liquidity trap

(redirected from Helicopter money)

Liquidity Trap

A recession during which banks are unwilling to lend and nominal interest rates are already at or near zero. Because interest rates are so low, the central bank can do nothing further to expand the money supply. At the same time investors are unwilling to invest to help the economy grow because banks are unwilling to lend because their returns are so low. This extends the recession and indeed makes it worse. Many economists believe that the best way to end a liquidity trap is a money gift, where the government directly transfers money to consumers in hopes that they will spend it to spur investment.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

liquidity trap

a situation where the INTEREST RATE is so low that people prefer to hold money (LIQUIDITY PREFERENCE) rather than invest it. At low rates of interest, the MONEY DEMAND SCHEDULE becomes infinitely elastic. In these circumstances, any attempt by monetary policy to lower interest rates in order to stimulate more INVESTMENT (see MONEY SUPPLY/SPENDING LINKAGES) will be futile, and will simply result in more money being held. KEYNES argued that in a depressed economy that is experiencing a liquidity trap the only way to stimulate investment is to increase GOVERNMENT EXPENDITURE or reduce TAXES in order to increase AGGREGATE DEMAND and improve business confidence about future prosperity, encouraging people to invest.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Fed Chairman Bernanke was set on deploying "helicopter money." Meanwhile, this week's yield curve inversion (though it never closed with a negative sign), something several of the more dovish FOMC members have been worried about, finally came to pass.
Bolder policies, such as targeting long-term bond yields or even using so-called helicopter money, remain legally tricky and politically taboo.
"In previous years, the 'helicopter money' provided by PPI refunds, along with generally less stringent lending requirements, helped to paper over the cracks that opened up as a result of a decade of persistently stagnant wage increases, but these avenues look to be closing themselves off.
One can appreciate why central bankers don't want to get gamed into some of the nuttier monetary policies that have been proposed, for example "helicopter money" (or more targeted "drone money") whereby the central bank prints currency and hands it out to people.
They are debating variations of so-called helicopter money. Former US Federal Reserve Chairman Ben Bernanke, among others, has said "helicopter drops" could revive flagging economies.
He went on to make a passing reference to Friedman's helicopter money idea: "A money-financed tax cut is essentially equivalent to Milton Friedman's 'helicopter drop' of money," he said.
They could, for example, create a programme that in a severe downturn would give every citizen a cash grant to be spent at their discretion, what Milton Friedman called"helicopter money." It's unclear, however, whether the world's largest economy can take the lead this time.
Ip includes a reference to Larry Summers' cited advocacy of the use of "helicopter" money for infrastructure purposes but I will leave that alone since the Cleveland Fed President, Loretta Mesta, was cited in an Australian published report as having advocated for the use of "helicopter" money but she has since stated clearly that is not the case ("Cleveland Fed President Loretta Mester did not advocate the use of helicopter money and does not advocate it.").
The shifting focus of major central banks from quantitative easing (QE) programmes to fiscal policy boosts through potential backdoor helicopter money will have knock-on effects that could lead the world into recession next year, Jakobsen told Gulf News in an interview.
Helicopter money is a new and rather pejorative term for an old and venerable solution.
At the same time, 53% of investors said it was unlikely a central bank would adopt a policy of helicopter money over the same period.

Full browser ?