Helicopter Drops and Liquidity Traps

During a liquidity trap, increases in the money supply have no real effects, as the nominal interest rate has reached its lower bound. We propose a theory of how helicopter drops of money can be effective during a liquidity trap. We develop a New Keynesian monetary model where the fiscal and monetary authorities are separated, and the latter faces balance sheet constraints. If the monetary authority can commit, helicopter drops are unnecessary in a liquidity trap, even under balance sheet constraints. However, we show that helicopter drops can help stabilize the economy when the monetary authority lacks commitment.