Introduction

When we view money as a commodity like rice, iron, or gold, it becomes easier to understand who benefits first. For instance, a farmer who produces more rice is the primary beneficiary because they can sell it at a profit. Similarly, a miner who finds more iron ore can sell it at a higher profit. In much the same way, in an expansionary monetary policy regime, the government issues more money to banks, who then pass it on to customers at a profit, usually through higher interest rates. While many borrowers benefit from lower interest rates, the banks are often the primary beneficiaries.

Who Benefits from Expansionary Monetary Policy?

The notion that any one party or group of people benefits solely from expansionary monetary policy is a misnomer. It is akin to asking, "Who benefits more from planting trees to convert CO2 to oxygen: people or farm animals?" Such a question is too simplistic and ignores the broader economic context. If the central bank implements expansionary policy to address issues like low employment and near-zero inflation, making borrowing cheaper to stimulate growth benefits everyone.

The Role of Central Banks

Central banks have the power to provide loans or lower interest rates, leading to increased borrowing and a rise in employment. However, this also means that inflation rates may increase. The real question is, who benefits in the end?

The Impact on Borrowers and Banks

The answer depends on the nominal interest rate on the expanded money. If banks and borrowers can benefit from the increase in the number of borrowers due to low interest rates, they are more likely to clamor for lower interest rates. On the other hand, if the interest rate is too high, it can price some individuals and businesses out of the market. For example, businesses may find it difficult to invest if their investment schemes cannot cover the cost of borrowing.

Balancing Interests

Thus, the ideal scenario is to hold the interest rate as low as possible without compromising on repayment. This can lead to mutual benefits for the central bank, retail banks, and private or commercial borrowers. By keeping the interest rates low, the central bank can encourage more borrowing, leading to job creation and further economic growth.

Conclusion

In summary, when central banks implement expansionary monetary policy, the benefits can be complex and depend on various factors, including the nominal interest rate. While banks may be the primary beneficiaries initially, keeping interest rates low can eventually lead to a broader economic benefit for both individuals and firms.