Question

How can a central bank use monetary financing (ie helicopter money) to allow the government to run up a bigger budget deficit?

Answer 1

Although helicopter money has been considered merely an intellectual thought experiment for decades, it is now seen by some analysts as a possible final resort for monetary policy in practice. It's also often called monetary financing, which means transparent monetary funding of government deficits. In order to assess helicopter money's costs and benefits.

The boost to demand is said to materialize with helicopter money through a perceived wealth benefit from households. This effect will not be created by the conventional methods of supplying central bank money, since the newly created money is typically applied to commercial banks merely as a loan or used to buy marketable assets from them. However, this distinction is not persuasive and may even be viewed as deceptive, as it implies a shift in the policy regime

It is an economic truism that helicopter money is the equivalent of an expansionary fiscal policy paired with an expansionary monetary policy. Accordingly, the economic consequences do have to be the same, i.e. similarly underlying. As a reaction to the crisis, major economies have not yet implemented consistent, expansionary fiscal policies. The US initially passed a massive stimulus bill, but this was quickly followed by state-level "austerity," and soon afterwards also at the federal level

While the original concept of helicopter money describes central banks making payments directly to people, economists used the word 'helicopter money' to refer to a wide variety of different policy proposals, including the 'permanent' monetization of budget deficits – with the additional factor of attempting to shock potential inflation or nominal GDP growth expectations in order to adjust exp. A second set of policies, similar to the original concept of helicopter money and more revolutionary in monetary history, includes the central bank making direct transactions of base money to the private sector, without the direct intervention of the tax authorities.