Cash transfers: Inflationary, welfarist or a fiscal blow?

What happens when a helicopter drops a large amount of cash on a local economy? Does the local GDP go up instantly? Of course not. Even a schoolkid's intuition tells you that the immediate result would be inflation. It is more money chasing the same amount of goods and services.

- AJIT RANADE

Such a 'helicopter drop' of cash fresh off the printing press is used as an unconventional and last-resort tool for a situation of extreme economic distress, such as a deep recession or liquidity trap. It is used after conventional monetary solutions like lowering interest rates to zero or making bond purchases have failed. Such a cash infusion means people receive 'free' money, with no associated debt or future tax burden, so that they can increase their spending, thus boosting aggregate demand. To the extent that their purchasing power is enhanced, and if additional goods and services are supplied in a noninflationary way, it improves their standard of living. Whether such a cash infusion is inflationary or welfare enhancing depends on the supply response, also called 'elasticity.' It depends on the efficiency of supply chains, which must pull in goods from other geographic markets to fulfill new demand without prices rising. When the central monetary authority injects freshly minted 'free' cash, it is called monetary policy. When a government (Union or state) does such a cash transfer, it is a fiscal tool, as it must dip into its treasury and displace some other expenditure item to do it.