What Is
Monetary Policy?
To define
monetary policy, it refers to the financial policies adopted by the monetary
authority of a country, such as the Central Bank, to achieve the country's
economic goals.
The primary goal
of monetary policy is to achieve specific economic objectives, such as
promoting price stability, supporting sustainable economic growth, and
maintaining low levels of unemployment. 
These goals are
often a combination of economic growth, price stability and credit
availability.
Central banks
utilize tools like interest rate changes, open market operations, and
quantitative easing to control money supply and interest rates, affecting
economic activities.
These actions
influence borrowing, spending, and investment, shaping overall economic
conditions and results.
What Are the
Types of Monetary Policy?
Monetary
policies are generally categorized as either expansionary or contractionary.
• Expansionary
policies are used to accelerate the economy by making capital easily
accessible.
• Contractionary
policies are used to fight inflation and slow economic growth when necessary.
While
expansionary policy may seem more intuitive, both expansionary and
contractionary policies are needed for the long-term health of an economy.
For example,
expansionary policy's low interest rates can result in harmful levels of
inflation and undisciplined investments, forming economic bubbles.
Unlike fiscal
policy, which pertains to policies on government taxation and spending,
monetary policy is independent from the political process.
The Central Bank operates autonomously in order to shield it from short-term political pressures, such as a presidential election.
This ensures
that the Central Bank may make the best decisions for the long-term health of
the economy
A country requires two policies to
run its economy i.e. Fiscal Policy and Monetary Policies. Both of these
policies are very crucial to steer and stabilize the economy and both the
policies have different approaches to different aspects of the economy.
Fiscal policy is more
concerned with government actions and generally deals with taxation and
expenditure of the country. Fiscal policy involves government spending and
government revenue to influence the overall economic activity and achieve
macroeconomic objectives.
Monetary policy is more concerned
with the money supply and interest rate of the country. The Central Bank has
all the authority and is responsible for setting monetary policy as per the
requirement in the economy. The main objective of the monetary policy is to
maintain price stability, ensure financial stability and promote economic
activity.
Fiscal policy is a government's approach
to taxation, spending, and budgeting that influences economic activity and
overall macroeconomic conditions. Monetary policy is the management of money
supply and interest rates by central banks to influence outcomes such as
inflation, employment, and economic growth.
Fiscal policy is
typically implemented through changes in government spending and taxation
levels; these decisions are made by the legislative branch of government, such
as Congress or Parliament.
Monetary policy
is managed by central banks, such as the Nepal Rastra Bank in Nepal.
The primary
purpose of fiscal policy is to promote economic growth and stability in an
economy by influencing aggregate demand and employment levels.
Monetary policy
is used to influence the cost and availability of money and credit, thus
affecting economic activity such as inflation, employment levels, interest
rates, exchange rates, business cycles, and investment activity.
Fiscal and
monetary policy are two very distinct and different concepts but they serve the
ultimate objective of a sound and stable economy of a country. Understanding
the difference between fiscal and monetary policy is essential for
comprehending their role in the economy. Some of such differences are as
follows.
|
|
Fiscal Policy |
Monetary Policy |
|
Definition |
A fiscal policy refers to the government decisions about taxation
and spending. A fiscal policy influences the overall economic activity and
achieves macroeconomic objectives. |
A monetary policy refers to the decision and activities by the
central bank to regulate and control the money supply, interest rates
and overall liquidity in the economy. |
|
Objective |
The major objective of fiscal policy is to influence the overall
economic activity and achieve goals on economic growth, employment and stability. |
The primary objective of this policy is to maintain price stability,
promote economic growth, and ensure financial stability. |
|
Focus |
Fiscal policy focuses on managing aggregate demand and addressing
economic challenges. Fiscal policy focuses on economic
growth. |
Monetary policy focuses on managing money supply, interest rate and
liquidity in the economy. Monetary policy focuses on economic stability. |
|
Authority |
Fiscal policy decisions are made by the government. |
Monetary policy decisions are made by the
central bank. |
|
Tools |
Government spending and taxation are the main tools of fiscal
policy. |
Open market operations, reserve requirements and discount rates are
main tools of monetary policies. |
|
Impact |
Fiscal policy measures have immediate impact on the economy. For
instance, government spending can lead to increased demand and job creation. |
Monetary policy measures have an indirect and lagged impact on the
economy. For instance, changes in interest rates shall take time to affect
borrowing and spending decisions. |
|
Timing |
Implementation of fiscal policy takes time as it requires due
legislative process and budgetary constraints. |
Implementation of monetary policy is comparatively immediate by the
central bank. |
|
Scope |
Fiscal policy can be targeted and sector-specific i.e. it can
target and address a specific issue. |
The scope of monetary policy is wide and broad. It affects the
overall economy. |
Reference
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