Thursday, July 28, 2016

What is Helicopter Money?

What is helicopter money?
·         The government spends, but when it spends more than it taxes, it must borrow. This is fiscal policy.
·         The central bank controls the money supply and can create new money, and uses those powers to push interest rates up or down. This is monetary policy.
·         Helicopter money just marries these two powers - The government spend using new money created by central bank (instead of using taxing & borrowing).

Pro & Con
·         Pro - It would allow the government to spend more, and thus juice job creation and wage growth, without increasing the deficit.
·         Con - Inflation could increase more than expected

When to use?
·         In the very low interest rate environment when interest rate cannot go down further (such as Japan which are currently at negative interest rate), helicopter money may be an alternative from that perspective.

The Japanese used to do it in Malaysia during World War II.. Back then, it was called Banana Money.