Tag Archives: Irredeemability

Non-Neutral Helicopter Drops

In an August 2014 Economics article, Willem Buiter discussed the conditions for a Friedman-type helicopter drop of money to be effective.

First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Only then will base money be willingly held despite being dominated as a store of value … Second, fiat base money is irredeemable: it is view[ed] as an asset by the holder but not as a liability by the issuer. … Third, the price of money is positive.

Deflation … are therefore unnecessary. They are policy choices. This effectiveness result holds when the economy is away from the zero lower bound (ZLB), at the ZLB for a limited time period or at the ZLB forever.

The feature of irredeemable base money that is key … is that the acceptance of payment in base money by the government to a private agent constitutes a final settlement … It leaves the private agent without any further claim on the government, now or in the future. The helicopter money drop effectiveness issue is closely related to the question as to whether State-issued fiat money is net wealth for the private sector, despite being technically an ‘inside asset’ …

… because of its irredeemability, state-issued fiat money is indeed net wealth to the private sector … even after the intertemporal budget constraint of the State (which includes the Central Bank) has been consolidated with that of the household sector.