The economy of any country is the most important topic to be discussed. Any economic decision of the country will affect its stability as well as its development and growth. There are many policies made by the government to regulate the economy of the country; Such two policies are Fiscal policy and Monetary policy.
Both are used to drive the country’s growth and economic development but have significant differences.
Monetary Policy vs Fiscal Policy
The main difference between Monetary policy and Fiscal policy is that Monetary policy is a tool used to regulate the flow of money for achieving stable economic growth, whereas Fiscal policy is a tool used in the management of tax revenues and spending for the overall growth of the economy of the country. Both have different natures of work. Monetary policy doesn’t change every year, whereas Fiscal changes every year.
Monetary policy is managed by Central banks, which ensures the economy to be stable throughout and works on the country by reducing inflation, managing employment levels, and regulating the flow of money. It doesn’t affect the economy directly, and unlike fiscal policy, it doesn’t change every year. It generally has low political influence and is mostly independent.
Fiscal policy is managed by the Ministry of Finance, which is used for the growth and development of the economy of the country and works on government’s collection and government’s spendings. The tools used for this purpose are tax rates, public spending, and demonetization. It generally has a very strong political influence. It has a direct effect on a country’s economy.
Comparison Table Between Monetary Policy and Fiscal Policy
| Parameters of Comparison | Monetary Policy | Fiscal Policy |
| Definition | Monetary policy is a tool administered by the Central bank of the economy which is used to regulate the flow of money and rates of interest. | Fiscal Policy is a tool that is administered by the Ministry of Finance and is used in the management of tax revenues and spending for the benefit of the economy. |
| Purpose | To achieve stability of price, stable economic growth, managing employment, controlling inflation. | To achieve growth and development of the economy of the country. |
| Tools used | The tools used are reserve requirement, discounted rates, credit ratios, interest on reserve, and open market operations. | The tools are mainly public spending, demonetization, and taxes. |
| Nature | It doesn’t change every year, but changes when the economy is needed to change. | After reviewing the previous year’s result, it changes every year. |
| Impact | Generally used to encourage or discourage them from investing in economic activities and has no direct impact on the economy. | It directly impacts the economy of the country and impacts the budget deficit. |
What is Monetary Policy?
Monetary Policy is one of the tool used by Centraal banks that helps them in regulating the flow of money that involves a change in the interest rates and influence money supply. Monetary policy focuses on the stability of the economy. It helps to control inflation, management of employment levels and has less impact on the real economy, and has effects on borrowing and mortgages.
Monetary Policies last longer and have less political influence. Unlike Fiscal policies, they don’t change every year and change only when the economy needs to be changed. It has various tools that help it in achieving the goals such as reserve requirement, discounted rates, credit ratios, interest on reserve and open market operations, etc.
Monetary policies are independent, and they are decided by the banks only. They are less preferred as, in some cases, they can cause inflation.
What is Fiscal Policy?
Fiscal policies are one of the policies which are managed by the Ministry of Finance that has the focus is to bring growth and development in the economy of the country. It focuses on the tax rates and spending of the government. Thye re responsible for changing the taxation levels and government spending levels.
Unlike Monetary policy, they are dependent and have much more political influence. There are no such specific targets, and they are changed every year. They are more preferred than Monetary policies. It directly impacts the economy and the budget deficit. For this, they used the tools such as public spending, demonetization, and taxes.
Government can increase their amount of spending in case they see not much economic activity going on. It works on government collection and spending for the growth of the economy.
Main Differences Between Monetary Policy and Fiscal Policy
- Monetary policy is managed by the Central banks, whereas Fiscal policy is managed by the Ministry of Finance.
- The monetary policy regulates the flow of money by using tools like reserve requirement, discounted rates, credit ratios, etc., whereas Fiscal policies manage the tax revenues and spending using the tools such as public spending, demonetization, and taxes rates etc.
- Monetary policies don’t change every year and change only when the economy needs to be changed, whereas Fiscal policy changes every year.
- Monetary is not preferred and has no political influences, whereas Fiscal is preferred and has good political influences.
- Monetary policies focus on the stability of the economy, whereas Fiscal policies focus on the growth and development of the economy.
Conclusion
Whether it is Monetary policy or Fiscal policy, both aim for the development for bringing stability and growth to the economy. They both ensure that economy works well and impacts the economy in one way or another just. The difference is that Monetary policy is made by the Central banks, whereas Fiscal policies are made by the Government of the country.
Both these works together sometimes to work at a faster rate but not always as because fiscal policies are much more influenced politically. It becomes a matter of political discussion. Monetary policies are just like subsets of fiscal policies. While everything has its pros and cons, Monetary policies are not much preferred, and fiscal are more preferred.
References
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=227060
- https://www.econstor.eu/handle/10419/217647