Alternative mechanism for monetary policy: 'helicopter money'

Abstract

The main objective of monetary policy is to maintain price stability. The European Central Bank tries to achieve this objective by aiming at an inflation rate below, but close to 2%. In today's situation the inflation rate is too low and this harms the economy in general. It results in more unemployment, more uncertainty, too little investments and too much savings. Therefore, a sound and solid monetary system is necessary to support the economic environment. Central banks have several tools in order to influence this inflation rate. Though, somehow these tools for monetary policy do not seem to be very effective in the Eurozone. That is why we try to figure out whether or not helicopter money could be an interesting alternative for monetary policy. In 1969 Friedman already mentioned helicopter money as a tool to boost the economy and to spur inflation. He introduced the concept of HM as follows: 'Let us suppose now that one day a helicopter flies over this community and drops an additional $1000 in bills from the sky, ... Let us suppose further that everyone is convinced that this is a unique event which will never be repeated' (Friedman, 1969, pp. 4'5). Of course, Friedman did not mean to actually drop money out of a helicopter, though his statement is clear. In existing literature HM is more specified as a permanent increase in the money stock in which this newly created money should be free and irredeemable.