ZappChai Explainers - Helicopter money

What would you think about receiving a cheque of 1000 from the central bank, no questions asked. If you are like most people you would probably be quite psyched about all the extra money at your disposal, especially if you're in the middle of a macro-economic slowdown where the money is hard to come by.

Today we understand helicopter money - what the term means and the implications it can have on consumer habits, inflation, and more!

Why the need?

With the world coming to a stand-still amidst the coronavirus lockdown, both governments and central banks have been contemplating on things to do to keep the economy going. While central banks have considered lowering rates, banks do not have the confidence to lend in the current environment, reducing the value of that tool in reviving the economy. Governments want to help as well, but with income streams drying up and debt ballooning they find themselves balancing between supporting the economy and maintaining the sovereign rating of the country.

Handing out money to people directly, as outrageous as that sounds, does serve the objective of getting money into the hands of people most effectively. It does this without increasing the borrowing on the federal level. The assumption here is that people actually spend the money reviving the economy, which may be hard in the current macroeconomic environment. Weighing the pros and cons

In terms of boosting aggregate demand, this perhaps one of the best measures out there. Unlike other monetary policy responses, this actually leads to an increase in wealth for a wide base who is more likely to spend the money than save it. The spending starts a virtuous cycle, protecting and creating jobs that could hopefully get the system back on track.

Before we jump at the idea it is important to realize that this is an extreme measure that the central banks should resort to only when the effectiveness of other measures seems to be low. The allure of the central bank simply sending out a cheque is bound to have its impact on both the government and the masses who may then expect such support even at times when it isn't called for. If such moves are done at a very large scale and with high frequency, it could result in a combination of high inflation and a sharp devaluation of the country's currency, both points the central banks would want to avoid.

Alternate applications

There could be alternate applications of this as well, with the central bank sending the money to the government, who can, in turn, use it for infra spend, tax breaks (more effective in certain countries than others) or perform a more targetted drop of the money so that the folks most in need of the money receive it.

There certainly are challenges to the execution of this and the implication it would have both on the currency as well as the long term independence of central banks. But with the world coming to a grinding halt, there will be more calls than ever to send in the choppers!

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