So when QE is used (or something similar that results in printing mone), where does the newly created money go? Does some entity get free money? Why is that allowed?


[...] where does the newly created money go?

This money is used by central banks to "buy" commercial banks' bonds $\iff$ commercial banks are refinancing themselves $\iff$ this money goes to commercial banks.

Does some entity get free money?

Yes, when central banks buy commercial banks' bonds for free, i.e. at a 0 interest rate.

Why is that allowed?

The main reason is that as counter-cyclical agents, central banks have to change reference rates to stimulate their national economies, even if sometimes doing so implies to center them on 0, or even on a negative value. Note that in the case of negative interest rates, we are talking about entities that are paid to get money.

E.g. when refinancing themselves at a lower-than-previously cost, commercial banks are theoretically more prompt to be, say, flexible, and thus to stimulate demands (here and there) in the national economy by lending money (here and there). If supplies stay constant, markets will reach a new equilibrium via prices rising (inflation) due to these stimulated demands. Persistent inflation means new business opportunities, which in turn means growth if capacities to cut these opportunities exist domestically, or thanks to foreign direct investments.

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  • $\begingroup$ "Yes, when central banks buy commercial banks' bonds for nothing, i.e. at a 0 interest rate." Huh? Is this really what they are doing though? $\endgroup$ – Giskard Oct 4 '18 at 19:38
  • $\begingroup$ @denesp, see e g. this 2016 article $\endgroup$ – keepAlive Oct 4 '18 at 20:00
  • $\begingroup$ @denesp and you know what? The ECB have even said that in the case of commercial banks not playing their "role" they would use an helicopter monetary policy which briefly consists of giving money to people for free. $\endgroup$ – keepAlive Oct 4 '18 at 20:09
  • $\begingroup$ These all seem to miss the point. They give nothing to the commercial banks for their bonds? No money at all? And then they redeem the bonds some years later and get money from the commercial banks? $\endgroup$ – Giskard Oct 4 '18 at 20:17
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    $\begingroup$ @denesp. "for free" instead of "for nothing" is more appropriate, which changes nothing regarding how you were surprised of discovering that 0 rates exist. Incidentally, "buy" and "lend" are synonymous in market finance. Idem for their antonymes of course. You are welcome $\endgroup$ – keepAlive Oct 4 '18 at 21:45

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