Pros and cons of helicopter money
Pros of helicopter money
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.
Cons of helicopter money
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.