Helicopter Money and BR1Ms?

Helicopter money is a reference to an idea made by American economist, Milton Friedman in 1969.

The basic principle is that if a central bank wants to raise inflation and output in an economy that is below its potential, one effective tool is to give targeted people with direct money transfers. In theory, the B40 would then spend freely and increase economic activity. That’s BR1M!

The problem is when they save (or hoard) instead of spending, which then reduces aggregate demand. So it is better to have vouchers or tokens that could be used to purchase specific items for daily living at specific places instead of cash transfers into accounts.

The second issue is when people are “addicted” by helicopter money it is difficult to wean them off. People expect a life-long grant. In addition, economic output by the recipients may diminish as they see helicopter money as another, stable alternative source of income.

As a short-term, targeted tool it may be used to stimulate the economy which is deemed performing below its potential. But this measure cannot be sustained on a long-term basis especially in a down cycle.

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