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Helicopter Money is Part of the Problem...
Fri, 13 May Pre-Open

A ‘Helicopter Money’ policy may not be politically feasible and may not derive economic benefits says RBI governor Raghuram Rajan. According to him, helicopter money is no panacea to stimulate growth or to revive the economic demand.

But what is helicopter money?

It’s a metaphor used to describe an unconventional monetary policy that allows central banks to print money and distribute it. As an article in Livemint points out, helicopter drop basically means higher government spending by increasing the monetary stock. So for an instance, the government deficit will not be financed by borrowings, as is the case under normal conditions. Rather, it would be financed by printing new currency. So the newly created money may go directly to consumers or can be used to finance public work such as infrastructure projects.

The basic purpose of this kind of money is to help central banks achieve inflation targets and boost economic activity. This is based on the assumption that with more money in the hands of public there will be more spending. So it serves an alternative to other monetary policy tools such as negative interest rate policy (NIRP).

How did it become popular?

Economists and commentators have, for most of the part, welcomed the idea of helicopter money. They are of the opinion that this kind of money policy will work better than other alternative monetary policy tools. This is because of the fact that QE and NIRP usually create chaos in the financial markets. They also lead to inequality by pushing asset prices. With that view in mind, policymakers across nations are backing the helicopter money option to stoke demand.

Why does Raghuram Rajan not agree?

As we’ve seen, helicopter money encourages spending and gives a fillip to demand. However, that may not be the case all time. According to Rajan, helicopter money may fail to stimulate demand if people respond by saving the handout rather than spending it. And this will contribute nothing to the growth, and at last will defeat the whole purpose. With this contrarian view evoked by Rajan, one can say that the success of helicopter money is far from proven.

The other major concern from this policy is that it allows government to expand spending. And excessive spending by the government may lead to damaging consequences in the long run.

Also, this kind of money may also lead to a scenario of ‘too much money chasing too few goods’.

What’s the way out then?

The drawbacks of helicopter money mean it perhaps stands at par with other unconventional monetary policy tools. And this brings us full circle. With so much significance placed on monetary policies, it can be figured out that something is wrong with the economy itself which is not getting resolved irrespective of the monetary measures.

The only solution to this can be an actual increase in productivity rather than it being artificially created by monetary policy measures.

As Rajan highlights... ‘Questions needed to be asked if global monetary policy was increasingly becoming part of the problem, not part of the solution.’

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Apr 25, 2017 01:52 PM

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