Manna from Helicopters

LONDON – In recent years, the global economy has been plagued by inadequate demand and the rising risk of deflation. Central banks have responded with a range of unconventional measures, including quantitative easing (QE) and negative interest rates. Today, however, there is a growing consensus that the efficacy of monetary stimulus has reached its limits. Further efforts to support economic recovery will likely require fiscal interventions, such as so-called helicopter money – the injection of funds into the economy by the central bank.

Calls for using this tool have mostly fallen on deaf ears. Policymakers worry that they lack fiscal space for such a maneuver or that introducing helicopter money would compromise the independence of central banks.

These concerns, while understandable, are misplaced. In periods characterized by deflation, helicopter money is as close to a free lunch as economics has to offer. The reason this is not widely understood is because of the traditional method used to calculate seigniorage – the profits governments make from the printing of money.

At present, our methods of calculation treat all increases in the money supply as temporary. This is true of, say, QE; with helicopter money, however, the change is permanent. The two interventions thus require different methods for calculating the revenue that governments receive from seigniorage.