Tuesday, August 09, 2016

More on helicopter money

I wrote about the possible use of helicopter money in the UK in my last post. The question is asked: how different is helicopter money from Quantitative Easing. Helicopter money is the government financing its spending by borrowing from the central bank. This leads to an increase in the creation of money. In QE too, the central bank pumps money into the system by buying bonds from banks.

So, where is the difference? As an article in the Economist explains, QE is, in theory, subject to reversal. The central bank can sell back the bonds in the market. This, of course, has not happened with the QE we have since post the crisis of 2007. Helicopter money, on the other hand, is a permanent expansion in money supply. It can, therefore, be expected to have a more stimulatory effect.

The flip side is that the markets would view helicopter money unfavourably for precisely that reason. It is easy money for governments- it's just a matter of dipping one's hands into the central bank's till. This could easily lead to a sharp depreciation in the currency.

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