Despite aggressive actions by central banks, many of the world’s economies are still stagnating and facing new shocks, leading to renewed calls for helicopter money as a serious policy prescription for countries like Japan and the U.K.. And, if things go badly, maybe the United States?

The expression “helicopter money” goes back to a 1969 thought experiment by Milton Friedman for one way a government could stimulate more spending and inflation:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community.

Friedman reasoned that people would naturally spend the money.

The first thing to note is that the operation would not have to be, and indeed should not and legally could not be, implemented by the central bank. The Treasury (the government’s fiscal authority) could perfectly well do the same thing, handing out cash (or writing checks) to random individuals, or surely better yet nonrandom distributions to those the government most wants to assist, or alternatively paying for infrastructure projects deemed most worthy. Put this way, it is clear that the most important dimension of the operation is fiscal, not monetary, in nature. The core element is a grant of more purchasing power to certain individuals.

And where would the Treasury obtain the cash to deliver to the favored recipients or the funds in its account with the Fed with which to write checks? The standard way this would work is the Treasury would sell bonds to the public. When a private bank buys those Treasury bonds, it would pay for them by instructing the Fed to transfer a sum from its account with the Fed into the account the Treasury has with the Fed, which funds the Treasury can then disperse in whatever form it likes. But suppose that in a second step, the Fed buys those Treasury bonds from the private bank. This would leave the Treasury’s account with the Fed back exactly where it was before any of this happened. The helicopter-chasers have new cash in their hands and the Fed is holding more government bonds than previously. Thought of this way, it’s clear that helicopter money is simply a combination of two conceptually separate operations– a debt-funded fiscal expansion coupled with a monetary expansion that replaces the debt with liabilities of the Federal Reserve.

Does it make any difference whether the Fed implements the second step at all? Narayana Kocherlakota thinks not too much:

In the first case (where investors buy the bonds), the Treasury pays interest on an added $100 billion in debt. In the second case (where the Fed creates money), the Fed pays exactly the same interest on an added $100 billion in bank deposits– which means that it can remit that much less money to the Treasury.

One tangible difference, though, is that while the Treasury likely borrowed by issuing 10-year bonds paying 1.5% interest, the Fed effectively borrows by paying 0.5% interest on accounts kept with the Fed (or 0% if the public ends up wanting to hold the funds as cash). So the Fed would remit something like 1% of the 1.5% interest the Treasury pays back to the Treasury. Thus at current interest rates, the Treasury would find it a little cheaper to carry out the operation with the Fed’s cooperation than without. However, this strategy also runs a risk of costing the Treasury more if the Fed’s cost of borrowing subsequently rise above 1.5%.

A separate question is what happens when the Treasury has to pay the Fed back? The Treasury could then sell a new bond to a bank and pay back the Fed with the proceeds. But the Fed could undo this by buying the new bond back from the bank. If the Fed somehow committed to keep doing this forever, in effect it has allowed the combined Fed-Treasury government balance sheet to borrow at something like 0.5% instead of 1.5%.

But how and why would the Fed make such a permanent commitment? As Cecchetti and Schoenholtz noted, in normal times the Fed can’t simultaneously choose a level for the monetary base and a separate value for the interest rate– if it’s committed to put more money out there permanently, then it must be committing to a different time path for future interest rates. Perhaps the action of buying more government bonds would make it harder for the Fed to later sell them, and thereby implicitly commits the Fed to a lower interest rate in the future. But these arguments are the standard ones for why large-scale asset purchases, the recent tool of choice for monetary policy, could perhaps have some stimulative effects in the current environment, albeit weak effects operating through subtle channels.

If helicopter money is no more than a combination of fiscal expansion and LSAP, and if we think LSAP hasn’t been able to do that much, it’s clear that the fiscal expansion part is where the real action is coming from. On the other hand, if we think both components make a difference, there’s no inherent reason that the size of the fiscal operation has to be exactly the same as the size of the monetary operation.

Nevertheless, as has been true with LSAP, there might be some psychological impact, if nothing else, from announcing this as if it were a new policy. For example, I could imagine the Fed announcing that for the next n months, it will buy all the new debt that the Treasury issues. For maximal effect this would be coupled with a Treasury announcement of a new spending operation. Doubtless the announcement would bring out calls from certain quarters that the U.S. was going the route of Zimbabwe. And just as in the previous times we heard those warnings, those pundits would be proven wrong, as indeed the effects would not be that different from what we’re already getting from central bank expansions around the globe.

Helicopter money is no bazooka for stimulating the economy. Ben Bernanke offered this reasonable summary:

Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances– sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies– such programs may be the best available alternative. It would be premature to rule them out.