Understanding Helicopter Money: Definition and Mechanisms

Recently, Helicopter Money has been frequently associated with policies that might be implemented by the Bank of Japan (BoJ). But what exactly is Helicopter Money?

Definition of Helicopter Money

Helicopter Money, or Helicopter Drop, is a metaphor for a radical monetary policy where a central bank prints large amounts of money and distributes it directly to stimulate economic growth. Many people mistakenly think of it as "direct cash handouts" to the public, but in reality, the money is used to finance government spending.

History of Helicopter Money

The term was first introduced by economist Milton Friedman in 1969 in his essay titled The Optimum Quantity of Money. Friedman used the "helicopter" illustration to demonstrate that the government could create inflation by printing more money. As this money is spent by the public, the Gross Domestic Product (GDP) would increase, either through higher production of goods and services or through rising prices.

Function of Helicopter Money

Although the concept of Helicopter Money sounds straightforward, no country has fully implemented this policy to date. Instead, countries like the United States and Japan have opted to use Quantitative Easing (QE) to stimulate the economy. QE differs from Helicopter Money in that the money printed is used to purchase government bonds to lower interest rates, whereas Helicopter Money directly increases the money supply in the economy.

Difference Between Helicopter Money and Fiscal Stimulus

Helicopter Money also differs from traditional fiscal stimulus. In fiscal stimulus, the government typically sells bonds to the market and uses the proceeds to fund projects such as infrastructure development or tax cuts. In contrast, Helicopter Money creates new money to buy government bonds without increasing interest rates, allowing government spending to rise without squeezing the private sector.

In theory, Helicopter Money combines elements of both QE and fiscal stimulus, aiming to boost inflation and drive higher economic growth.

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