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The simple analytics of helicopter money: Why it works - always

Listed author(s):
  • Buiter, Willem H.

The author provides a rigorous analysis of Milton Friedman's parable of the "helicopter" drop of money a permanent/irreversible increase in the nominal stock of fiat base money rate which respects the intertemporal budget constraint of the consolidated Central Bank and Treasury - the State. Examples are a temporary fiscal stimulus funded permanently through an increase in the stock of base money and permanent QE - an irreversible, monetized open market purchase by the Central Bank of non-monetary sovereign - debt. Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable - viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists - even in a permanent liquidity trap - a combined monetary and fiscal policy action that boosts private demand - in principle without limit. Deflation, "lowflation" and secular stagnation are therefore unnecessary. They are policy choices.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2014-28
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File URL: https://www.econstor.eu/bitstream/10419/100652/1/794107036.pdf
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Article provided by Kiel Institute for the World Economy (IfW) in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 8 (2014)
Issue (Month): ()
Pages: 1-51

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Handle: RePEc:zbw:ifweej:201428
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  1. Gauti B. Eggertsson & Neil R. Mehrotra, 2014. "A Model of Secular Stagnation," NBER Working Papers 20574, National Bureau of Economic Research, Inc.
  2. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters,in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework Princeton University Press.
  3. Fama, Eugene F., 1983. "Financial intermediation and price level control," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 7-28.
  4. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
  5. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  6. Willem H. Buiter, 2003. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," NBER Working Papers 10163, National Bureau of Economic Research, Inc.
  7. Gerald Nickelsburg, 1984. "Dynamic Exchange Rate Equilibria with Uncertain Government Policy," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 509-519.
  8. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-293, June.
  9. Robert J. Gordon, 2014. "The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections," NBER Working Papers 19895, National Bureau of Economic Research, Inc.
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