Essay comparison between
Helicopter Money vs. Quantitative Easing
In recent decades, central banks have faced unprecedented challenges in maintaining economic stability during times of crisis. Two unconventional monetary policies, Helicopter Money (HM) and Quantitative Easing (QE), have been debated and implemented to varying extents. While both strategies aim to stimulate the economy, they operate through fundamentally different mechanisms and implications. This essay explores the distinctions between these two policies and assesses their roles in monetary policy frameworks.
Mechanism
Quantitative Easing
Central Bank buys long-term financial assets like government bonds and corporate securities to improve the liquidity through the financial system. It increases bank reserves, lowers long-term interest rate, encourage borrowing and investment (Bernanke, 2020).
Helicopter Money
Individuals or governments distribute newly created money, bypassing financial intermediaries. It is the same as fiscal spending funded by money creation, where central banks "drop" money directly to consumers often via cash transfers or tax rebates (Friedman, 1969).
Transmission
Quantitative Easing
QE works indirectly through financial system by increasing the value of financial assets, lowering borrowing costs and encouraging credit expansion. The impact of this policy depends on the willingness of banks to lend and of consumers to borrow thus it may lead to delays in economic recovery, especially during periods of low consumer confidence (Joyce et al., 2012).
Helicopter Money
HM directly increases demand by giving money to households or funding government programs. The immediate increase in income / purchasing power boosts consumption and aggregate demand without relying on intermediary channels unlike QE which needs to go through banks or financial markets (Buiter, 2014).
Primary Beneficiary
Quantitative Easing
QE directly helps financial markets and asset holders. It increases prices and lowers yields so owners of stocks, bonds or real estate benefits. Problem here is that it widens wealth inequality (Haldane, 2014).
Helicopter Money
HM gives money to general population or government agencies directly to stimulate spending / consumption among a broader demographic. It directly addresses the liquidity needs of households reducing the risk of inequitable monetary benefits.
Impact on Inflation
Quantitative Easing
QE increases the money supply, but not the inflation since most of the created money remains in financial reserves rather than circulating the economy. In some cases, QE failed to meet inflation targets as seen in Japan and the Eurozone (Gagnon, 2016).
Helicopter Money
HM is inflationary because it directly increases spending and aggregate demand. The risk of hyperinflation is higher if HM is not managed carefully since it creates money without corresponding economic output (Buiter, 2014). There will be more money chasing the same supply of goods and services.
Reversibility
Quantitative Easing
QE is reversible since Central Bank can sell the assets bought during QE to withdraw liquidity from the financial system. This gives flexibility to counter inflationary pressures. (Bernanke, 2020).
Helicopter Money
HM is non-reversible. Once money is distributed, it can't be withdrawn or recalled back. It is a permanent addition to the money supply which increases the risk of hyperinflation and makes monetary policy adjustments more complex.
Monetary and Fiscal integration
Quantitative Easing
QE is purely monetary policy tool by Central Bank within the traditional framework of monetary policy which focuses on liquidity and interest rate management.
Helicopter Money
HM blurs the line between monetary and fiscal policy as it often requires coordination between central bank and government agencies. It raises concern about the independence of monetary authorities (Blanchard & Pisani-Ferry, 2020).
Real-Life Examples
Quantitative Easing
Quantitative Easing has been widely implemented by central banks to address economic downturns. Below are two notable examples:
Example 1: The Federal Reserve during the Global Financial Crisis (2008-2014)
In response to the 2008 financial crisis, the U.S. Federal Reserve (Fed) introduced QE in three major rounds, purchasing over $4 trillion in assets, including government bonds and mortgage-backed securities. The objective was to stabilize financial markets, lower long-term interest rates, and encourage borrowing and investment.
- QE1 (2008-2010): $1.7 trillion in asset purchases to stabilize the banking sector.
- QE2 (2010-2011): $600 billion in Treasury securities to spur economic recovery.
- QE3 (2012-2014): Open-ended purchases of $85 billion per month until economic conditions improved (Bernanke, 2020).
Example 2: European Central Bank during the Sovereign Debt Crisis (2015-2018)
The European Central Bank (ECB) launched a QE program in 2015 to address deflationary risks and the Eurozone's sovereign debt crisis. The ECB purchased government and corporate bonds, totaling over €2.6 trillion by 2018. This program successfully reduced borrowing costs for struggling Eurozone economies like Greece, Spain, and Italy, while stabilizing inflation and economic growth across the region (Hartley & Rebucci, 2020).
Helicopter Money
In 2016, Japan considered policies resembling Helicopter Money during its struggle with deflation and stagnant economic growth. Though outright HM was not implemented, the government engaged in large fiscal stimulus programs funded by central bank interventions. Specifically, the Bank of Japan (BOJ) supported fiscal spending by maintaining ultra-low interest rates and purchasing government bonds, effectively monetizing debt (Koo, 2016).
Additionally, during the COVID-19 pandemic, some countries, including the United States, adopted measures that bore similarities to HM. The U.S. provided direct cash payments to households under fiscal stimulus packages, such as the $1,200 stimulus checks distributed in 2020. While these payments were technically fiscal measures, they were financed by substantial monetary expansion facilitated by the Federal Reserve, blurring the lines between HM and traditional fiscal policy (Blanchard & Pisani-Ferry, 2020). This is the same thing as the Emergency Cash Transfers implemented in the Philippines that I discussed in our class.
Conclusion
In summary, QE and HM differ in their mechanisms, primary beneficiaries, and risks. QE relies on financial market channels to stimulate the economy, while HM provides direct financial support to households or governments. QE has been widely implemented and studied, whereas HM remains largely theoretical. These differences highlight the distinct advantages and challenges of each policy in addressing economic crises. Personally, I think QE should still be used, but if there’s a need to immediately stimulate the economy and prevent recession or depression, HM may be a useful solution.
References
Bernanke, B. S. (2020). The new tools of monetary policy. American Economic Review, 110(4), 943-983. https://doi.org/10.1257/aer.110.4.943
Blanchard, O., & Pisani-Ferry, J. (2020). Monetary-fiscal interactions in the post-COVID era. Peterson Institute for International Economics. https://www.piie.com
Buiter, W. H. (2014). The simple analytics of Helicopter Money: Why it works – always. Economics: The Open-Access, Open-Assessment E-Journal, 8, 1-49. https://doi.org/10.5018/economics-ejournal.ja.2014-28
Friedman, M. (1969). The optimum quantity of money and other essays. Aldine.
Gagnon, J. E. (2016). Quantitative easing: An underappreciated success. Peterson Institute for International Economics. https://www.piie.com
Haldane, A. (2014). The distributional impact of monetary policy. Bank of England. Retrieved from https://www.bankofengland.co.uk
Joyce, M. A. S., Lasaosa, A., Stevens, I., & Tong, M. (2012). The financial market impact of quantitative easing in the United Kingdom. International Journal of Central Banking, 7(3), 113-161.
Hartley, J., & Rebucci, A. (2020). An event study of COVID-19 central bank quantitative easing in advanced and emerging economies. National Bureau of Economic Research. https://doi.org/10.3386/w27339
Koo, R. (2016). The escape from balance sheet recession and the QE trap: A hazardous road for the world economy. Wiley.
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