Having the central bank create money to finance government spending directly is a monetary tool that legitimately could be considered in extreme circumstances, Federal Reserve Chairwoman Janet Yellen said Wednesday.
The concept, referred to as “helicopter money,” or something like it “is something that one might legitimately consider,” Yellen said at a press conference, mentioning specifically the possibility of the central bank coordinating closely with fiscal authorities such as the U.S. Treasury.
Nevertheless, Yellen said that the idea of helicopter drops was mostly limited to academic discussions, and would only become a consideration in a “very abnormal extreme situation where one needs an all-out attempt” to rescue the economy.
Keeping the central bank independent from fiscal authorities, she said, was important in normal times for avoiding high inflation or hyperinflation.
But in the case of an economy suffering a recession and deflation, there might be a case for using new tools like helicopter drops, she said.
Normally, the Fed adjusts monetary policy by changing its target for short-term interest rates. In 2008, however, it drove rates all the way to zero without sparking a recovery. At that point, the Fed turned to unconventional tools, including quantitative easing, meaning large-scale purchases of longer-term bonds.
Yellen was asked about the possibility of helicopter drops by a reporter who referenced the fact that Yellen’s predecessor, Ben Bernanke, had given credence to the concept in a recent blog post.
