The Case Against Helicopter Money

MUNICH – Despite years of expansionary monetary policy, the European Central Bank has failed to push inflation back up to its target of “below but close to 2%.” The latest measures – a zero interest rate on the ECB’s main refinancing operations, an increase in monthly asset purchases from €60 billion ($67 billion) to €80 billion, and an even lower deposit rate of -0.40% – are unlikely to change this. That is why some economists are urging the ECB to go even further, with so-called “helicopter drops” – that is, financing private consumption by printing money.

The idea of helicopter money dates back to the monetarism debates of the 1960s. A central bank, it was argued, never runs out of options for stimulating aggregate demand and stoking inflation, provided it is willing to resort to radical measures. But what was once a theoretical notion now seems to be a concrete possibility.

In practice, helicopter drops would arrive in the form of lump-sum payments to households or consumption vouchers for everybody, funded exclusively by central banks. Governments or commercial banks distributing the money would be credited with a deposit or be given cash, but no claim would be created on the left-hand side of the central bank’s balance sheet.

This type of single accounting would reduce the central bank’s equity capital, unless it realized (sold) valuation reserves on its balance sheet. Proponents defend this approach by claiming that central banks are subject to special accounting rules that could be adjusted as needed.