Helicopter Money Q&A

After years of massive economic stimulus, the Bank of Japan (BOJ) could become the first central bank to adopt “helicopter money” in an attempt to jolt the economy out of stagnation. This highly unconventional policy approach has drawn the ire of many in the market community. In this Q&A we explore why this might be the case.

What is Helicopter money?
Helicopter money was first coined by American economist Milton Friedman in a famous paper called “The Optimum Quantity of Money.” The paper, which was published in 1969, sets out the following parable:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

In its most theoretical form, helicopter money involves giving cash directly to residents, who will then use it to stimulate the economy. According to Paul Sheard, chief global economist at S&P Global, in today’s context helicopter money refers to a “kind of monetary policy and fiscal policy coming together as one thing.”[1] From there, the concepts of helicopter money become more and more complex. In modern times, helicopter money is likely to include direct transfers into people’s bank accounts, tax breaks or government spending.[2]

Does helicopter money work?
Nobody knows for sure because it hasn’t been tried yet. The idea is that people would see the money transfer as a one-off payment, which would allow them to spend more freely, thereby expanding the amount of money in circulation.[3]

How is it different from other forms of quantitative easing?
Modern quantitative easing programs, such as the current BOJ effort or the Federal Reserve’s massive bond-buying program that ended in 2014, involve massive purchases of assets from the financial markets. Rather than carrying purchases via asset swaps (i.e., where a government bond is swapped for bank reserves), helicopter money directly influences aggregate demand instead of relying on the trickle-down effect from the financial markets.[4]