Central banks across the globe were struggling to spur economic growth at times following the 2008-09 financial crisis and Great Recession. They had used nearly all their tools to attempt to spark economic growth, including negative interest rates and stimulus programs that buy bonds every month.
The Bank of Japan (BOJ) and the European Central Bank (ECB) quickly made deep cuts to their interest rates, attempting to stop banks from hoarding money and encouraging lending to consumers to support growth. The International Monetary Fund (IMF) warned of fragile global macroeconomic growth, which could lead to turbulence in the global financial markets. Consequently, central banks ended up looking for new ways to spark economic growth, such as "helicopter money," which provided an alternative to the quantitative easing (QE) they were already undertaking.
So just what is the difference between helicopter money and QE? Let's take a look.
- When central banks run out of conventional monetary policy tools, they still have some alternatives to spur economic growth.
- Quantitative easing (QE) allows a central bank to purchase longer-term or non-government securities from the open market in order to increase the money supply and encourage lending and investment.
- Helicopter money refers to quickly increasing the money supply, including through fiscal measures such as increased spending or tax cuts, as a means of jump-starting a weak economy.
Differences Between Helicopter Money and QE
Helicopter money, or a "helicopter drop", is a theoretical and unorthodox policy tool that central banks or governments can theoretically use to stimulate economies. Economist Milton Friedman introduced the framework for helicopter money in 1969, but former Federal Reserve Chair Ben Bernanke popularized it in 2002. This policy should theoretically be used in a low-interest-rate environment when an economy's growth remains weak. Helicopter money involves the central bank or central government supplying large amounts of money to the public, as if the money was being distributed or scattered from a helicopter. This can be enacted as monetary policy by a bank, or as fiscal policy by a government through massive tax cuts or spending programs, including relief programs like the stimulus checks paid to American households during the 2020 crisis.
In contrast to the concept of using helicopter money, central banks can also use quantitative easing to increase the money supply and lower interest rates by purchasing government or other financial securities from the market to spark economic growth. Unlike helicopter money, which involves the distribution of printed money to the public, central banks use quantitative easing to create money and then purchase assets using printed money. QE does not have a direct impact on the public, while helicopter money is made directly available to consumers to increase consumer spending.
Differences in Economic Consequences
One of the main benefits of helicopter money is that the policy theoretically generates immediate consumer demand, which comes from the ability to increase spending without the worry of how the money would be funded or used. Although households would be able to place the money into their savings accounts rather than spend the money if the policy were only implemented for a short period, consumer consumption theoretically increases as the policy remains in place over a long period of time. The effect of helicopter money is theoretically permanent and irreversible because money is given out to consumers, and central banks cannot retract the money if consumers decide to place the money into a savings account.
One of the primary risks associated with helicopter money is that the policy may lead to a significant currency devaluation in the international foreign exchange markets. The currency devaluation would be primarily attributed to the creation of more money.
Conversely, QE provides capital to financial institutions, which theoretically promotes increased liquidity and lending to the public, since the cost of borrowing is reduced because there is more money available. The use of the newly printed money to purchase securities theoretically increases the size of the bank reserves by the quantity of assets that were purchased. QE aims to encourage banks to give out more loans to consumers at a lower rate, which is supposed to stimulate the economy and increase consumer spending. Unlike helicopter money, the effects of QE could be reversed by the sale of securities.
Helicopter Money in Practice
Although helicopter money is an unorthodox tool to spur economic growth, there are less extreme forms of the policy if other economic tools have not worked. The government or central bank could implement a version of helicopter money by spending money on tax cuts, and thereafter, the central bank would deposit money in a Treasury account.
Additionally, the government could issue new bonds that the central bank would purchase and hold, but the central bank would return the interest back to the government to distribute to the public. Therefore, these forms of helicopter money would provide consumers with money and theoretically spark consumer spending.