Bryan Caplan  

Classifying a Helicopter Drop

Austro-Keynesianism... Status Quo Bias and Conformity...
A question for economists of all factions:
What would you call a "helicopter drop" of cash: "monetary policy" or "fiscal policy"?
Please explain your answer.

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COMMENTS (24 to date)
Sohaib writes:

Isn't the only difference whether or not it is added to the deficit?

Chops writes:

If the helicopter drop gives money to citizens in proportion to their existing wealth, then it is clearly monetary policy.

If it involves the government printing money and lending it at near-zero interest rates to the banks, then it is monetary policy at the cost of a large transfer.

If it involves the government printing money and making direct purchases, then it is fiscal policy with a soupcon of inflation.

Jason writes:

The Fed or Treasury writes a check to every person in the US for X dollars, and everyone gets the same X. Its just like the standard helicopter drop concept except people don't kill each other scrambling for the money.

Brandon Berg writes:

Depends on whether the money is freshly printed or taken from tax revenues, doesn't it?

Will writes:

Fiscal policy.

Why? Because it increases the net worth of certain individuals in the non-government sector (whoever gets the money). In this way it resembles a fiscal operation, and not a monetary operation (such as setting an interest rate or exchanging assets of different liquidity).

Now, while certain central bank operations DO involve an increase or decrease in the net worth of the non-government sector (eg. a bank sells toxic assets to the Fed), they are accompanied by an equivalent and opposite change on the government's balance sheet. A helicopter drop of cash increases the net worth of those who collect the money in the same way as the purchase of a bridge increases the net worth of those individuals who sell the bridge the the government.

Alex Godofsky writes:

Depends on whether Fed does it or Congress does. Who cares which bucket we put it in?

MikeP writes:

Isn't the point of the question that the Fed won't do it? They need something to put on their balance sheets -- something purchased with the newly printed money. "Goodwill" destined to be written off just won't cut it.

So it's fiscal. Helicopters don't drop money into banks, except possibly as deposits.

Lord writes:

I wish the Fed could do this, well they could 'lend' everyone some money without collateral in perpetuity but they have no precedent for it and never would, so I would have to say fiscal as who gets how much is a political question, one the Fed wouldn't touch though they could say every adult citizen, even if the debt is purchased by the Fed, yet if no debt were created I would be more inclined to call it both fiscal and monetary since it limits its reversibility.

Gary Rogers writes:

Generally the Fed will print money and use it to purchase bonds in order to add money to the system. Fiscal stimulus does just the opposite. It issues bonds, which takes money out of the system, then spends the borrowed money. The fiscal policy is a wash as far as increasing money supply but it adds some nasty debt that will come back to haunt future administrations.

A "helicopter drop" is most accurately described by fiscal policy. The purpose, IMO, is to increase the net financial assets of the private sector by creation of new money. Monetary operations are merely an asset swap between the central bank and private banks, which can increase liquidity, but does not actually increase net financial assets. Fiscal deficits, however, add either reserves or treasuries (depending on central bank policy) to the non-government sector. Therefore, fiscal policy most accurately represents printing money and either a surge in spending or significant tax rebate would probably classify as a "helicopter drop."

bill woolsey writes:


It increases the quantity of money.

But it is a transfer payment at the same time.

John Fast writes:

I'm with bill woolsey. I teach my Intro to Macro students that "Fiscal policy doesn't work except when it becomes monetary policy."

(Of course some of the devils are in the details. I'm assuming you mean a standard inflationary, deficit-increasing helicopter drop.)

And, for what it's worth, while I occasionally mention Bernanke's helicopter, I always talk about how the Fed conducts open market operations like Pulp Fiction -- Bernanke carries a briefcase full of cash (no doubt zillion dollar bills) into a room full of bankers, and walks out with the briefcase empty of cash and full of securities.

This, of course, gets the cash out of circulation and into the hands of the Fed, where it sits idle (except that Bernanke makes it into a big pile and dives into it).

Garrett writes:

A true helicopter drop, an increase in the money supply, is clearly monetary policy. The only helicopter drop-type policy that would fall under fiscal policy would be a transfer payment of some sort, and if you take microeconomics seriously, then this actually makes the public worse off (ordinally ranked preferences) and definitely doesn't create money out of thin air.

@MikeP: You are correct in saying that the Fed wouldn't do a true helicopter drop, because they would need to increase their balance sheet in some form. However, the purchasing of toxic assets and bad debt is essentially a helicopter drop; the toxic assets do show an increase in the balance sheet, but it is only meant to justify a large increase in the money supply. That is why the Fed does such things - because it takes a government backed entity to participate in such terrible deals.

aaron writes:


A helicopter drop would be Fiscal, but may require coordination or help from the Fed. The treasury would likely need the Fed to keep interest rates low for it to run the needed deficit.

I would classify two types of policy objectives as a helicopter drop. 1.) A very broad, rather equal distribution of money. 2.) A very simple distribution of money to a structurally significant part the the economy (eg., bubble mortgage debtors).

The Fed cannot control the distribution of money well, allowing it to pool in areas where it is not useful and not allowing it to reach vital areas.

A proper helicopter drop would have been a moratorium on income taxes, a tax break on principal payment, a very big refinancing program targeting bubble debt, or something of the sort.

Anonymous writes:

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Andrew writes:

It is both. And it is also neither.

A true helicopter drop is an increase in the monetary base WITHOUT a corresponding accounting offset.

Floccina writes:

If it increases money supply it is monetary policy. So if it is funded by the creation of new cash it is monetary policy, if it funded by selling debt i.e. t-bills or from tax income it is fiscal policy.

Charles R. Williams writes:

A helicopter drop is fiscal and not monetary. It is not unlike the Making Work Pay credit except that there may be an element of randomness. There is no clear effect on money supply. If I get a $100 bill on my porch I will deposit it the next time I get to the bank. Demand deposits go up just enough to offset the drop in demand deposits when individuals purchased T-bonds to finance the helicopter drop.

It is also fiscal in the sense that there is a transfer of resources from one group of people to another group of people. Monetary policy involves the purchase and sale of liquid financial assets and the resulting effect on asset prices (i.e., interest rates) or alternatively engaging directly in borrowing or lending at market interest rates. Whatever wealth transfers occur should be the result of correctly forecasting central bank actions - provided monetary policy is conducted properly.

MikeP writes:

Here's the ideal helicopter drop:

1. Congress passes a bill issuing a $1000 loan to every citizen at 0% interest with a 200 year term, forgiven at death. These securities can be exchanged, but they are still bound by the original recipient's death.

2. Those citizens take these notes to the bank to get $1000 for each.

3. The bank takes the notes to the Fed to get $1000 for each.

In effect, Congress has just printed money, the Fed has its securities, the delusion is complete, and everybody is happy.

Most important, the economy gets raw inflation without federal deficit or collateral interest impacts.

Philo writes:

What the comments suggest to me is that it is wrong to suppose there is a sharp distinction between monetary policy and fiscal policy. I suppose that was your point.

MattW writes:

Who's flying the helicopter, congress or the fed?

JeffM writes:

The idea behind the helicopter drop is purely monetary. Unlike the classical idealization of a simultaneous, proportional, and universally known increase in everyone's money holdings, the idealization of the "drop" assumes a random increase in some holdings. The effect of both is to eliminate the Cantillon effect, one through the mechanism of knowledge and the other through the mechanism of chance. The closest thing in empirical reality to to such non-Cantillon idealizations are times when governments have issued a "new" mark or franc to replace a severely depreciated currency. The immediate effect of the pro-rata introduction of a new money that never existed before is monetary: it changes prices proportionally. (In real life, such introductions have usually been accompanied by credible governmental pledges to change fiscal policy and so likely had secondary effects first on expectations and then on real economic activities.)

Most of the discussion here has been whether Fed operations approximate such a ceteris paribus ideal and whether current Fed operations are primarily monetary or fiscal in their effects. Current Fed operations clearly do not result in random (or proportional) increases in money holdings. They do not even approximate helicopter drops.

The effect of Fed operations is both fiscal and monetary: by monetizing government debt, the Fed permits increases in government demand without directly decreasing private demand through taxation, and by altering interest rates, expectations of inflation or deflation, and private holdings of money, the Fed affects private demand (though whether positively or negatively is anybody's guess). Moreover, institutional constraints transfer resources to a handful of investment banks who make profits from acting as a conduit of governmental paper from the Treasury to the Fed. This is about as far from the "random" nature of a helicopter drop as is imaginable.

Mike Rulle writes:

Hmm---this is a game regarding the definition of "helicopter drop". Here goes.

Fiscal policy targets explicit recipients and thus creates incentives for those targeted. Monetary Policy is more generalized and does not target explicit recipients.

For example, the stimulus bill of 2009 had expenditures aimed at a specifically documented lists of recipients----even as it was financed largely by the Fed buying Treasuries.

QE, on the other hand, simply exchanges printed money for Treasuries. My understanding of the definition of a pure "helicopter drop" is its indifference toward the specifics of who benefits.

Thus by definition--(my definition)--a helicopter drop is monetary policy.

James Ooi writes:

A helicopter drop is when the Fed pays more than fair value for assets.

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