The Simple Analytics of Helicopter Money: Why It Works — Always

Abstract

Abstract The paper offers a rigorous analysis of Milton Friedman’s parable of the ‘helicopter’ drop of money – a temporary fiscal stimulus funded through an increase in the stock of fiat base money that is never completely reversed in present discounted value (PDV) terms. A monetized fiscal stimulus is more expansionary than a debt-financed one because a monetized expansion of the Central Bank balance sheet is profitable: it relaxes the intertemporal budget constraint of the State – it creates fiscal space. It is up to the fiscal authority to make appropriate use of this fiscal space. Four conditions must be satisfied for a helicopter money drop to boost aggregate demand. First, it must not be reversed fully in PDV terms. Second, there must be benefits from holding fiat base money other than its pecuniary rate of return: that is, the interest rate on any additional base money issued is below the rate of return on the Central Bank’s assets. Third, fiat base money is irredeemable – an asset to the holder but not a liability to the issuer. Fourth, the price of money is positive. Given these conditions, there always exists – even in a permanent liquidity trap – a combination of monetary and fiscal policy actions that boosts private and/or public demand demand) – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore policy choices. Other conclusions are: (1) the increase in the monetary base need not be permanent for helicopter money to be effective; (2) Treasury debt cancellation by the Central Bank or the purchase by the Central Bank of perpetuities (with zero, negative or positive coupons) rather than finite maturity debt are fundamentally irrelevant policy actions. At most they have signaling value; (3) dropping perishable helicopter money will make it more effective if households are liquidity-constrained.