IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/9998.html
   My bibliography  Save this paper

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

Author

Listed:
  • Buiter, Willem H.

Abstract

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.

Suggested Citation

  • Buiter, Willem H., 2014. "The Simple Analytics of Helicopter Money:Why It Works – Always," CEPR Discussion Papers 9998, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9998
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9998
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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. Michele Lenza & Huw Pill & Lucrezia Reichlin, 2010. "Monetary policy in exceptional times," Economic Policy, CEPR;CES;MSH, vol. 25, pages 295-339, April.
    7. Willem H. Buiter, 2003. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," NBER Working Papers 10163, National Bureau of Economic Research, Inc.
    8. Gerald Nickelsburg, 1984. "Dynamic Exchange Rate Equilibria with Uncertain Government Policy," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 509-519.
    9. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-293, June.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    central bank; helicopter money; liquidity trap; quantitative easing; seigniorage;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9998. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.