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The economic term “Helicopter Money” is closely related to the liquidity injections into the economy. Several countries adopted the method of helicopter money and faced either a partial positive response or disastrous consequences. The concept was implemented in some countries mainly during the great depression of 1992 and 2008. This article throws light on everything about helicopter money. Through this article, you will learn about the origin, benefits of helicopter money, the cause cycle that led to the creation of the concept of helicopter money, and its implications on the Indian Economy.
About Helicopter Money
Helicopter Money can be defined as an unconventional monetary policy tool to revive the country’s economy when it’s in a liquidity trap. For simplicity, we can say that the simple act of dropping down the money from a helicopter is referred to here. Under this policy, the central bank is directly involved in increasing the money supply and, through the government, distributes the money to the population of the country. The new cash is generated in the economy by printing large sums of money to boost the demand and thereby increase the country’s economic activity, leading to inflation.
The origination of the Helicopter Money
The term, Helicopter Money, was first coined by American economist Milton Friedman in 1969. The concept was later revived and became famous during the 2000s. In November 2002, the governor of the Federal Reserve Bank, Ben Bernanke, once again introduced the helicopter drop of money in his famous speech as an anti-deflationary measure. After the global financial crisis of 2008, several economists went ahead with the variants of helicopter money like quantitative easing and debt jubilee.
The cause behind the idea of Helicopter Money
The previous discussion it’s crystal clear about some parts related to the helicopter money, like the definition and its origin. Now let’s look into the details as to what leads a country to adopt the concept of helicopter money into its economy.
During the depression phase of the economy, the cash held by the people decreased. The fall in cash holding leads to a fall in demand for goods and services in the economy, decreasing the supply of the commodities in the market. A decrease in the supply reduces the prices of the commodity. As the price decreases, the economic activities also decrease, leading to a fall in economic growth and a rise in unemployment. As the unemployment level rises, people again have less cash with them. It’s a chain of events that are interrelated to one another.
Pros of Helicopter Money
Money Supply into the economy through some effective monetary policy is always considered good and helps stimulate the economy. The few benefits of helicopter money are as follows:
High inflation rate- People tend to spend more money while purchasing goods and services with the free money provided by the government, thus increasing the inflation rate in the market.
Boost the economy- Helicopter Money helps to boost the economy. It increases the amount of cash in the hands of the people and thereby increases the economic activities and growth of the country.
No risk of borrowing from outside- One of the most vital benefits of this idea is that the government doesn’t have to borrow from other authorities as debt and pay high-interest rates. So the economy will be stable if the government uses the concept of helicopter money.
Increases the demand for goods- People will start purchasing more as the helicopter money will help them to increase their spending capacity. Thus this will increase the demand for goods and services in the economy.
Cons of Helicopter Money
As helicopter money has some pros, it negatively impacts the economy. Some of the cons are as follows:
Not a reliable method- Theoretically, helicopter money is a possible event, but there are real-life examples where the countries miserably failed to revive the country’s economies through this concept.
Devaluation of the currency- Another negative impact is a high risk of devaluation of the currency in the foreign exchange market. As the supply of money increases, there is a high chance that the value of the domestic currency will fall to a greater extent.
No track of the money spending- People hardly keep track of their money spending with the helicopter money, which is again not good for the economy.
India’s economy and helicopter money
Several countries have implemented the concept of helicopter money to revive the economy. In developing countries like India, where the economy is in a depression, there is always the question of will helicopter money will help the Indian Economy. Telangana was the first state to propose the implementation of helicopter money into the Indian Economy in 2020 when the Covid-19 pandemic. To question the answer, helicopter money to extend would help boost the Indian Economy. It would help to infuse liquidity into the system and increase the country’s economic activities. It’s going to increase the demand in the market due to the rise in the disposable income of the people.
Conclusion
The concept of helicopter money originated in the 1960s, and then it was implemented by several countries like Japan, Venezuela, Zimbabwe, etc., to revive their economy during the depression phase. There is still a debate on whether it was successful or not. Looking at the history, it was partially helpful, while in some other countries, it failed miserably. The reason behind introducing the concept of helicopter money is the depression in the economy. As there are pros to the idea, there are negative impacts of it as well. The government should go through the policy with utmost care as if it works out, then it’s good for the economy, and if it fails, there would be a detrimental effect on the country’s economy.
