Central banks across the globe are struggling to spur economic growth in 2016. They have used nearly all their tools attempting to spark economic growth, including negative interest rates and stimulus programs that buy bonds every month. The Bank of Japan and the European Central Bank have cut their interest rates into negative territory, attempting to stop banks from hoarding money and encouraging lending to consumers to support growth. The International Monetary Fund (IMF) has warned of fragile global macroeconomic growth, which may lead to turbulence in the global financial markets. Consequently, central banks are looking for new ways to spark economic growth, such as "helicopter money," which provides an alternative to quantitative easing (QE).

Differences Between Helicopter Money and QE

Helicopter money is a theoretical and unorthodox monetary policy tool that central banks use to stimulate economies. Economist Milton Friedman introduced the framework for helicopter money in 1969, but former Federal Reserve Chairman 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.

Contrary to the concept of using helicopter money, central banks 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 with 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 the 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 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.

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