Helicopter money: Study by TU economists analyses its effects
The European Central Bank (ECB) has been trying to stimulate the economy for many years now, whereby experts are considering an injection of so-called helicopter money among other measures. Economists at TU Darmstadt have been investigating what people would do with it.
Given a nominal interest rate of zero per cent and very low inflation, new strategies are needed to prevent the European economy from eventually descending into a deflationary spiral. Lowering the nominal interest rate had been regarded as the standard tool for economic recovery until the economic crisis of 2007. However, the ECB can no longer continue pump money into the economy in this way, because the key interest rate must never fall below zero per cent. Buying up government bonds also remains a controversial strategy because it could be a form of hidden government funding.
„In this situation,” says Professor Michael Neugart, Professor for Public Economics and Economic Policy at TU Darmstadt, “people are once again more or less openly considering unconventional measures such as helicopter money.” The term “helicopter money” comes from a thought experiment from 1969 by the US economist Milton Friedman, involving a one-off additional cash injection in the form of 1000 dollar bills dropped over a community from a helicopter. The key question is whether a financial injection of this kind would alter people’s buying behaviour thereby influencing the development of prices and the economy.
Neugart and his research colleague Dr. Uros Djuric have been looking into what people would do with helicopter money today, in terms of what they would expect from it and their views on it as an instrument of monetary policy. The experts compared four scenarios in their behavioural economic study. In the first, the participants were invited to imagine that they and everyone else in the euro zone would receive a one-off payment of EUR 1,200 from the Ministry of Finance, financed from ECB funds. In the second scenario, they would receive the same sum in the form of a cheque directly from the ECB. In the third, the EUR 1,200 would be paid out in twelve monthly instalments. The participants in scenario four, which served as a control group were asked to imagine a lottery win of EUR 1,200.
The results of the study show that people’s spending patterns in all “helicopter scenarios” would be no different than if they were to win the lottery. The respondents in all four scenarios reported that they would spend around 40 per cent of the sum, save another 40 per cent or so and use the remaining 20 per cent to pay off some of their debts. The majority of respondents would not expect prices to rise as a result of such a measure, nor would they expect it to have any effect on the overall economic situation.
Neugart regards the approximately 40 per cent that would flow into consumption as a positive sign. „Helicopter money,” he says, “could perhaps help us out of the recession. However, we cannot predict whether the effect would be sustainable.” Yet, from the wide range of responses received he surmises that the participants know very little about this instrument and are correspondingly unsure.
On the whole, the economist is sceptical about the use of helicopter money, not least because of the unpredictable media impact and the unverifiable effects on the inflation rate. Neugart would rely more on fiscal policy measures that promote investment in such fields as road construction, mobility, the energy sector and the digital infrastructure as solutions to the problems within the eurozone.
About the study
The data for the study „Helicopter money: survey evidence on expectation formation and consumption behaviour“ by Uros Djuric and Michael Neugart comes from the representative panel of the Leibniz Institute for the Social Sciences (GESIS). Around 4,900 participants aged between 18 and 70 were interviewed in the course of this mixed mode panel. The responses to the study questions were provided in the spring of 2016, at a time when Germany’s GDP had risen by 1.5 per cent compared with the previous year, the unemployment rate had fallen to just 4.1 per cent and the rate of inflation stood at 1.67 per cent.
Professor Michael Neugart