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Monetary policy vs. fiscal policy: an overview

Monetary policy is typically implemented by a central bank. It involves changing interest rates, and the supply of money and credit, which can influence the economy.

Fiscal policy decisions are set by the national government. They include changing tax rates and levels of government spending, which can also influence demand in the economy.

Monetary and fiscal policy can be used in tandem to shape economic performance. In general terms, stimulative monetary policy is designed to improve an economy’s rate of output growth (measured by Gross Domestic Product or GDP); tight or restrictive monetary policy is designed to put a brake on the economy, generally to offset inflationary pressures. In a similar way, stimulative fiscal policies such as tax cuts and spending increases are normally expected to boost economic growth in the short run, while tax increases and spending cuts tend to slow the rate of future economic expansion.

***So, governments’ views on fiscal stimulus range from reluctance in some quarters to big promises in others.*** Always remember that the cost ultimately falls to the taxpayer. Or, if funded by government borrowing, to the taxpayers of the future. Nonetheless, global growth and inflation are still sluggish, and the world is waiting to see how this challenge will now be met.


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