Helicopter drops in an open economy when markets are incomplete

Abstract

We characterize the spillover effects of helicopter drops and optimal monetary policy in a tractable two‐country overlapping generations model with incomplete markets. As helicopter drops can affect the distribution of income across countries, they create room for redistribution policies which are particularly relevant when agents are heterogeneous and markets are incomplete. Under cooperation, central banks can implement the conditionally Pareto optimal allocation using helicopter drops (and suctions) to “lean against the wind.” In a non‐cooperative setting, helicopter drops exacerbate the incomplete markets' friction by making income more volatile. This paves the way for gains from cooperation.