To influence the outcome of macroeconomic productivity, the ruling authority of a nation relies upon either a combination of singular fiscal policy or monetary policy says Paul Haarman.
While monetary policy includes managing the money supply and interest rates through central banks, to stimulate an ailing financial system, the reserve bank cuts interest rates, makes borrowing more accessible, and increases the supply of money. On the other hand, when the financial system snowballs, the reserve bank can implant a tighter monetary policy via increased interest rates and cutting back on the money in circulation.
Comparatively, the fiscal policy helps determine the ruling authority’s earnings via taxes and public spending. If they intend to restore a nation’s finances, the ruling authority cuts tax rates and improves government spending. While restoring an overheated economy, the government can increase tax rates and lower spending.
There are plenty of debates among economists concerning the significance of each policy and which one proves to be a better tool for the economy.
Monetary policy as put forward by Paul Haarman
Reserve banks exercise monetary policy to attain objectives regarding their macroeconomic policies. While certain reserve banks aim to target only a specific degree of inflation. Other reserve banks establish to execute maximum employment rates and achieve price stability.
Further, nations also try to keep their monetary policies and authority separated from political influence from outside. The external influence can blur the objectives or even undermine the mandate. Several reserve banks operate as independent authorities regulating several monetary policies.
In place of a fast-paced economy, when inflation rises to a problematic level, the reserve bank of a nation can utilize a tighter monetary policy to withhold money supply, which will effectively result in a reduced level of circulating money.
Advantages of Monetary policy
There are specific interest rates aimed at controlling inflation. Implementation is relatively convenient here. Most reserve banks are independent and neutral to political influence. There is improvement in exports as a result of a weakened currency, declares Paul Haarman.
Fiscal policy can influence the nation’s economy via alterations to the government’s tax rates and public spending. When the budgetary policy is restrictive, tax rates get increased while federal spending gets cut back. On the other hand, tax rates get lowered with an expansionary fiscal policy, and spending brings a freeway. A loose fiscal policy also encourages economic growth.
Advantages of Fiscal Policy
The spending directs towards particular projects or purposes. Taxation can demoralize negative externalities. Time lagging is shorter comparing to monetary policy, points out Paul Haarman.
The main idea is that both fiscal policy and monetary policy. Along with its tools, are in use as a combination to aid in keeping steady economic growth, reducing inflation, improving employment rates, and price stability.
Since there is no general strategy to use singularly for bringing about the advantages of both the policies, when used efficiently, the combination of both policies can bring about positive net benefits to the society, especially when the nation faces a crisis and demands action. Therefore, robust measures become mandatory to revive the economy.