The Simple Analytics of Helicopter Money:Why It Works – Always

This paper aims to provide a rigorous analysis of Milton Friedman’s famous parable of the ‘helicopter’ drop of money. A helicopter drop of money is a permanent/irreversible increase in the nominal stock of fiat base money with a zero nominal interest rate, which respects the intertemporal budget constraint of the consolidated Central Bank and fiscal authority/Treasury – the State. An example would be a temporary fiscal stimulus (say a one-off transfer payment to households, as in Friedman’s example), funded permanently through an increase in the stock of base money. It could also be a permanent increase in the stock of base money through an irreversible open market purchase by the Central Bank of non-monetary sovereign debt held by the public – that is, QE. The reason is that QE, viewed as an irreversible or permanent purchase of non-monetary financial assets by the Central Bank funded through an irreversible or permanent increase in the stock of base money, relaxes the intertemporal budget constraint of the State. Future taxes will have to be cut or public spending increased. There are three conditions that must be satisfied for helicopter money as defined here to always boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Only then will fiat base money be willingly held despite being dominated as a store of value by non-monetary assets with a positive risk-free nominal interest rate. Second, fiat base money is irredeemable: it is view as an asset by the holder but not as a liability by the issuer. This is necessary for helicopter money to work even in a pure liquidity trap, with risk-free nominal interest rates at zero for all maturities. Third, the price of money is positive. The paper shows that, when the State can issue unbacked, irredeemable fiat base money with a zero nominal interest rate, which can be produced at zero marginal cost and is held in positive amounts by households and other private agents despite the availability of risk-free securities carrying a positive nominal interest rate, there always exists a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, inflation below target, ‘lowflation’, ‘subflation’, liquidity traps and the deficient demand-driven version of secular stagnation are therefore unnecessary. They are policy choices.