The only powerful argument against helicopter drops is the one that Heise and Hamada stress – the political risk of overuse. If monetary finance is no longer prohibited, politicians might use it to curry favor with political constituencies or to over-stimulate the economy ahead of an election. Hamada oddly suggests that proponents of monetary finance ignore this risk; but in my own IMF paper, and in Bernanke’s recent blog post, it is a central concern.
History provides many examples of excessive monetary finance, from Weimar Germany to the many emerging economies where governments have pressured central banks to finance large fiscal deficits, with high inflation the inevitable result. So a valid argument can be made that the dangers of excessive monetary finance are so great that it should be prohibited entirely, even if in some circumstances it would be the best policy.
But a valid argument is not necessarily a convincing one. After all, other policies to support demand growth, or a failure to implement any policy, can be equally dangerous. It was deflation, not hyperinflation, that destroyed the Weimar Republic. Hitler’s electoral breakthrough of 1932 was achieved amid rapidly falling prices.
Helicopters on a Leash