Rajan questions 'helicopter money'; says people may not spend

As the world debates 'helicopter money' to spur economic activities, RBI Governor Raghuram Rajan today questioned such an easy direct-to-public money transmission and said people may resort to saving rather than spending.
'Helicopter drop of money' is used as a metaphor for an unconventional monetary policy tool that typically involves central banks printing large sums of money and distributing it directly to the public or investing in public projects.
So far a hypothetical monetary policy, it is being debated to spur spending and boost economic growth in times of near-zero interest rates and ultra-low or negative inflation.
Delivering a lecture here tonight, Rajan said when the rate of price rise threatens to fall below the lower band or zero, one of the options before the governments and central banks is 'helicopter drop' of money.

However, there is a probability that people may not spend and save it, thereby not contributing to growth, he said.
'Helicopter drop' was first proposed as an alternative to quantitative easing by the noted American economist Milton Friedman way back in 1969. However, it became popular when Ben Bernanke referred to this term in 2002, when he was a Federal Reserve Governor. This earned 'Helicopter Ben' moniker for Bernanke, who became Fed Chairman in 2006.

The term has become even more popular in recent times in the wake of the US central bank's quantitative easing (QE) policy and is now being referred to as 'QE for the public'.

Interestingly, Bernanke as Fed Chairman embarked on various rounds of 'quantitative easing' to invest trillions of dollars into the system to boost economic growth in the US.
Rajan, known for his frank views on domestic and global macroeconomic issues, today appeared to disapprove of the lower interest rates to boost growth, saying low rates actually lead to people saving more rather than spending.
If the global economy hasn't got strong growth even 7- 8 years after 2008 meltdown, the problem may be that enough of conventional policy was not resorted to, he said.
"Could easy and unconventional monetary policy be... Part of the problem? It was part of the solution post financial crisis. Liquidity provision was extremely important. However what was done then has continued... For long," he said.

Asking if an aggressive monetary policy could have run out of steam, he said very low-cost and easy capital does not "turf out" inefficient firms.
"Lower the interest rate, the more is the saving... People aren't going out celebrating when interest rates get cut. Rather people are actually saving more because they need pension, they worry about viability of government fund pensions," he said.
"You could have perverse effects of very low interest rates and perverse effects of substantial fiscal stimulus. These things eventually run out of steam," he said.