We Can't Just Drop Money Out of Helicopters

Samuel Rines

Economics, Americas

Injecting money directly into the economy is a bad idea.

"Helicopter money” is, in essence, exactly what it sounds like: money falling from the sky. Newly minted money is pushed into the economy in the hopes that it will create demand for goods and services, spurring economic growth and inflation. It bypasses the bank lending function that injects quantitative easing dollars into the economy, and combined with ultralow or even negative rates, it has the capacity to become very interesting very quickly.

Central banks appear to be in a tight spot, since economic growth, in nearly every country and region, is anemic. But here’s the thing—most central banks are not supposed to care (directly) about growth. Rather, central banks are almost universally tasked with achieving a certain level of inflation, known as inflation targeting. The U.S. Federal Reserve’s mandate is to achieve “maximum employment, stable prices, and moderate long-term interest rates.” Notice that there is no mention of economic growth in there.

The ubiquity of the inflation mandate for central banks should cause some concern. Growth is not a zero-sum game, but inflation may be. This is where the mandated goals of global central banking (prices and jobs) deviate from the perceived political goals of running a country (growth and stability).

It is this incongruence that makes helicopter money problematic for central banks: it would work against their stated mandates. Certainly, there are instances where figuratively throwing money from the air could be successful. It might cause short-term, likely one-time increases in inflation expectations. But these pressures would dissipate quickly, and could even reverse.

More to the point, by injecting a significant amount of money into an economy, inflation pressures would rise domestically as capacity utilization increased and the demand for labor—and therefore wages—rose. But “helicopter money” would likely be perceived—and, in practice, executed—in a similar fashion to the now-mundane practice of quantitative easing. And like QE, the policy would have the effect of weakening exchange rates vis-à-vis countries that do not implement it.