Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero. It is also referred to as a helicopter drop, in reference to a helicopter scattering supplies from the sky.
Discover the impact of central bank decisions on financial markets
Helicopter money is an unconventional alternative to quantitative easing, but both aim to boost consumer spending and increase inflation. While helicopter money increases monetary supply by distributing large amounts of currency to the public, quantitative easing increases supply by purchasing government or other financial securities to spark economic growth.
If a country faces slow or no growth, it could consider a helicopter drop. For example, in 2016, Japan considered using helicopter money to assist with the country’s slowing growth.
Financial markets showed concerned with the decision, as participants feared hyperinflation and currency devaluation. So, the Bank of Japan (BoJ) opted for an alternative method to increase monetary supply. This included different partnerships and purchases such as government bonds, infrastructure outlays and payments to lower-income earners.
Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged. Generally, helicopter money boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.
Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
A country’s central bank sets its interest rates to reach economic growth targets. However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan). Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market. As more money is printed and supply increases, the value of the domestic currency could significantly decrease. It could also discourage speculators from buying the currency as it is less likely to perform well.
Discover how to trade with IG Academy, using our series of interactive courses, webinars and seminars.
Or ask about opening an account on 1800 601 799, or +61 3 9860 1799, or helpdesk.au@ig.com.
If you're calling from NZ, you can contact us on 0800 442 150
We're here 24 hours a day, except from 7am to 5pm Saturdays (AEST).
