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If Central Banks Give Away Money, What Might Happen to Exchange Rates?

By Frances Coppola

With world economic growth slowing and interest rates already zero or even negative in some places, many economists are calling for central banks to find more tools to fight recession and deflation. One option being discussed is for central banks to give money away to ordinary citizens—what is sometimes called “helicopter money.” That has not happened before. So, if central banks start doing this, what might be the effect on currency exchange rates?

'Helicopter Money’ Could Counteract Slow Economic Growth


An argument often made for helicopter money is that increasing the stock of money in circulation counters slow economic growth by stimulating economic activity. The theory goes that if there is more money circulating in the economy, people will have more to spend; this increased spending will encourage businesses to produce more, thus generating jobs. Increased spending may also raise inflation, which could result in a lower exchange rate, thus helping exporters.


In a growing economy, money is created when banks lend, and destroyed when loans are repaid or cancelled: money creation typically slightly exceeds money destruction, so the total amount of money in circulation gradually increases in line with economic growth. If central banks add money directly to a growing economy, rather than relying on commercial banks to create money in response to demand for loans, they can trigger high inflation like that in the 1970s.


But after a financial crisis—when economic growth slows or falls—the stock of money in the economy can fall rapidly as people pay off or default on loans and don’t replace that borrowing, just as banks hurt in the crisis tend to do less lending. The economists Milton Friedman and Anna Schwartz argued that it was this “debt deflationary” fall in the stock of money that caused the Great Depression.1


In the Great Recession of 2008-9 and thereafter, central banks heeded Friedman’s advice and used quantitative easing (QE) to add money to the economy, thus preventing a catastrophic fall in the quantity of money in circulation. However, some argue that the money created by QE does not go to people who will spend it productively. It goes to those who own financial assets, who are typically rich. Because rich people already have enough money to meet all their daily needs, their propensity to spend any additional money they are given on goods and services produced by businesses is very low. They are more likely to invest it in other financial assets, which may or may not result in increased business investment. Thus, increasing the money supply with QE may not have much effect on either inflation or exchange rates.2


Economists who advocate helicopter money in times of slow economic growth say that instead of relying on QE, central banks should give money directly to ordinary, middle-income citizens, because they are more likely to spend it on goods and services. This would encourage businesses to produce more, thus generating jobs and increasing both the incomes of workers and the returns to shareholders. It would also typically raise inflation and lower the currency exchange rate.3


Helicopter Money vs. Government Deficit Spending


In most countries, the central bank is an arm of government. Some economists observe, therefore, that helicopter money simply amounts to higher government spending. So, they argue, instead of distributing money to ordinary citizens, governments should increase their deficits in times of slow economic growth. If distribution of money in the economy needs to be skewed more toward those with a higher propensity to spend, the government can simply increase transfers to lower-income people and/or cut taxes for low- to middle-income people. The central bank could finance the ensuing increase in the government deficit by creating new money.4


However, central bank financing of government deficit spending has long been associated with extremely high inflation and currency exchange rate collapse. For example, in Venezuela, the central bank has been financing a rising government deficit. Venezuela’s currency exchange rate has collapsed, the country is experiencing hyperinflation and the government has defaulted on its external debt. As a result, Venezuela is in deep recession, and production has all but ceased.5 The experience of Venezuela, and previous hyperinflationary episodes in (among others) Germany, Hungary and Zimbabwe, is the reason why many fear central bank financing of government deficits. In many countries, including the United States, it is illegal.6


One-off drops of helicopter money to ordinary people by the central bank could be a way of increasing economic activity in the economy without risking the high inflation and currency exchange rate collapse associated with explicit monetization of a government deficit.7 It could also help ensure that monetary stimulus aimed at ordinary people is seen as temporary: tax cuts and transfer increases can be politically difficult to reverse.8


Helicopter money could also be a way of increasing purchasing power in the economy when the government lacks the fiscal space or the political will to increase spending. For example, in the Eurozone some countries are too highly indebted to increase spending, while others are unwilling to do so for political reasons. The economist Eric Lonergan argues that the European Central Bank (ECB) should stimulate the Eurozone economy by giving money directly to every citizen.9


Some economists argue that temporary monetary stimulus in the form of helicopter money would not be necessary if governments invested sufficiently, for example in public works, social housing and small businesses. They argue for large increases in government spending via state investment banks. In times of slow economic growth, central banks could buy the bonds issued by those banks as part of their QE programs.10 However, others say that as public investment is a long-term initiative, helicopter money would still be needed to address short-term variations in purchasing power due to economic shocks.11


Helicopter money created and distributed by an independent central bank to counter slow economic growth, recession and deflation could help to stabilize currency exchange rates in the aftermath of a financial shock such as that in 2008. However, if central banks were directed by government to explicitly monetize rising government deficits, the result could be high inflation and currency exchange rate collapse. To enable central banks to deploy helicopter money in a way that does not threaten exchange rate stability, steps may need to be taken to safeguard central bank independence.

Frances Coppola - The Author

The Author

Frances Coppola

With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.


1. “The Great Contraction: 1929-1933,” Friedman & Schwartz;
2. “The case for People’s Quantitative Easing,” Coppola;
3. Ibid.
4. “Helicopter money is a fiscal operation and is not inherently inflationary,” Mitchell
5. “Hyperinflation, Industry, Cash and Salaries in Venezuela,” Venezuelan Analysis;
6. “Are Government Deficits Monetized?” Federal Reserve Bank of Philadelphia;
7. “Dealing with the next downturn,” Blackrock Investment Institute;
8. “The case for People’s Quantitative Easing,” Coppola;
9. “Legal helicopter drops in the Eurozone,” Philosophy of Money;
10. “Bringing the helicopter to ground,” Institute for Innovation and Public Purpose;
11. “The case for People’s Quantitative Easing,” Coppola;

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