Monetary policy does not work by increasing actual borrowing. That is not the causal channel of the monetary policy transmission mechanism. Monetary policy works by increasing spending, not borrowing. And one person's spending is another person's income, so people in aggregate do not need to borrow more in order to spend more. Their increased spending finances itself.This is model specific, of course. Read the whole post, or at least section #1. This is a very nice example of the need for macro analysts to avoid the temptation to simply aggregate micro intuition. Feedback and resource constraints matter. General equilibrium matters. Says Rowe,
Yep. Macro is hard. You can't just sit back and think "how would I react if my rate of interest fell?" You have to think about how my reactions would affect others, and how their reactions would affect me, and so on.