The Economist explains: Why central banks are talking about throwing money from helicopters

Posted: May 2, 2016 in economy
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CENTRAL banks have gone to extraordinary lengths to get their slumping economies moving again: cutting interest rates to zero (and beyond) and buying vast amounts of government debt. Yet as the rich world continues to stumble along in a world of low inflation and weak growth, despite rock-bottom interest rates, a new policy proposal is entering the discussion: “helicopter money”, shorthand for printing money to fund government spending or to give people cash. In March Mario Draghi, the president of the European Central Bank, described helicopter money as a “very interesting concept”. Haruhiko Kuroda, the Governor of the Bank of Japan, ruled the option out for now when asked recently. Yet the longer stagnation continues, the greater the odds that government eventually gives the policy a shot. But how exactly would helicopter money work, and what would it do to an economy?The evocative concept of helicopter money comes from Milton Friedman, the father of monetarism, who mused in 1969 that central bankers could never fail to boost the money supply since they could always drop newly printed bills from the sky onto the cash-starved economy below. The idea cropped up again in the early 2000s, as economists puzzled over how to spring the Japanese economy from its deflationary trap. Ben Bernanke, at the time a new governor at the Federal Reserve, made reference to Friedman’s …

via Economic Crisis


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