At times, we see some news article in a business newspaper, that claims that "...the government has made, significant changes in its optimal fiscal and monetary policy...". But have we ever wondered, what is the exact meaning of the terms monetary and fiscal policy. Though these two concepts are parallel, there are some distinguishing factors of fiscal and monetary policy. The best way to understand the differences between these two policies is to simplify the constituents of the policies.
An Overview of Monetary Policy Vs. Fiscal Policy
As many of us know, the term monetary has been derived from the word 'money'. The monetary policy basically deals in the government functions that are related to money. Many among us believe that the government issues bank notes and coins, and sits back and enjoys the benefits of industrialization and economic growth. This belief is in fact a myth, as there are several different functions that the government fulfills except from issuing the currency. These money-related functions come under the domain of monetary policy of the government. The general monetary policy of the government often includes functions such as maintaining the supply of money on the basis of current economic conditions, maintaining the availability of money, by changing the different banking and monetary indexes, and also controlling the rates of interest.
The monetary policy of nations is divided into two sub-policies, which are, expansionary policy and contractionary policy. The expansionary policy is usually used during the time of recessionary cycles. In order to increase the supply of money. This policy also involves, the reduction in rates of interest, which in turn combats the rising rate of unemployment. The contractionary policy is used in order to reduce the effect of inflation, as the rate of interest is increased. To sum up the side of monetary policy, let's just say that the government policy that influences money, supply of money, circulation of money and availability and cost of credit is the monetary policy. It must be noted that most of the constituents of the monetary policy are implemented by the central bank. It must be also noted that this policy is more often used for economic growth.
The fiscal policy is not exactly the contrast of the monetary policy, it is just a different policy that is closely associated with the monetary policy of the country. With the important role that the central bank has to play in the implementation of the monetary policy, the governments are not left far behind. The role of governments is extremely important when one is studying the fiscal policy vs. monetary policy. The fiscal policy is basically the policy of revenue and expenditure that is adopted by the government. This kind of policy basically affects the welfare and economic development that is implemented by the government. The fiscal policy is used as a tool by the governments to increase or decrease taxes and also increase and decrease expenditure of the government to aid the public needs. The fiscal policy is usually decided by the finance ministry, department of revenue and department of corporate affairs. The fiscal policy thus directly affects the welfare of the people.
According to the principles that have been laid down by Keynesian economics, the fiscal policy can be effectively used to stimulate aggregate demands of the common citizens. Taxation and spending of the government formulated according to the needs of the people, and the aggregate demand and supply for common commodities and civic amenities is a very good fiscal policy. Democratic governments always frame their fiscal policy 'for the people'.
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