Helicopter money – It works! It works!

Last year I wrote several articles on helicopter money in which I critisized the work of economists as Buiter (2016) and Boonstra (2016) who claimed that the implementation of helicopter money would guarantee higher inflation in a model that assumes Ricardian Equivalence (RE). My point was that helicopter money does not work in those models. But dump this idiotic assumption and it will work, Always!

First I want to point out that my findings on helicopter money were confirmed by Borio (2016), who came to the exact same conclusion:

Given the intrinsic features of how interest rates are determined in the market for bank reserves (bank deposits at the central bank), the central bank faces a catch-22. Either helicopter money results in interest rates permanently at zero – an unpalatable outcome to most, including those that advocate monetary financing – or else it is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the desired additional expansionary effects.

So helicopter money will not work in economic models that assume Ricardian Equivalence as helicopter money is equivalent to deficit spending. But how realistic is this assumption?

Ricardian Equivalence assumes that consumers include the budget constraint of the government in their own budget constraint. When the government now finances a tax cut via a budget deficit, it is assumed to have no effect on household consumption, as the budget constraind of the household is not relaxed. In this case the household saves the money it got from the government in order to pay for the increase in tax rates that it now expects in the future. I think this is quite an assumption to make.

First of all, consumers may be irrational, but they are not idiots (most of them). I really do believe that consumers will at least to some degree take into account that the money, that is spend via deficit spending, will come back in the form of higher taxation in the future. Although this might depress consumption a bit, I do not think that consumers will consciously save for higher taxes in the future.

However, I do not think that people are even close to rational. And I have to admit, that if I – an economist – would get a large sum of money deposited in my bank account, I would also spend/invest more than in the situation that I do not get this sum of money. And I am pretty convinced that most non-economist people will not react in a much more rational manner on average.

And even Ricardo himself did not believe in Ricardian Equivalence. The following passage is from “The Works of David Ricardo” (1846):

“In point of the economy there is no real difference in either of these modes, for 20 million in one payment, 1 million per annum forever, or 1,200,000 for forty-five ears, are precisely of the same value; but the people who pay the taxes never so estimate them, and therefore do not manage their private affairs accordingly.”

So if you want to support helicopter money, than just do this via a model that does not assume RE. Helicopter money would probably boost inflation just as government spending would probably boost inflation with the benefit that “helicopter money” sounds even more like free money. As people see the world through the lens of emotion, this last feature gives helicopter money a considerable advantage over deficit spending.

If you have any questions: @basvanderhout


Van der Hout, OXB (2016). Helikoptergeld: waarom het nooit werkt! Economische Statistische Berichten.

Boonstra en Van Schoot (2016). Geld scheppen met Boonstra en Van Schoot. Economische Statistische berichten.

Buiter (2016). The Simple Analytics of Helicopter Money: Why It Works – Always.

Borio, Disyatat and Zabai (2016). Helicopter money: The illusion of a free lunch.

McCulloch (1846). The Works of David Ricardo. Page 539.

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