Differences Between Fiscal and Monetary Policy
Fiscal policy is managed by government of any country by cutting or expanding collection of revenue through direct and indirect taxes influencing spending of the people, while monetary policies are managed by Central bank of any country which involves changes in interest rates and influencing money supply in the nation.
Both the policies are essential for effectively running a nation and promoting its economy. However, it is essential to note that monetary policy alone will not affect an economy positively. It needs to work hand in hand with fiscal policies.
The fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. is a government initiative of implementing tax reforms and changing government spending to ascertain economic development. The finance ministry plans and influences government revenue and expenditure as part of the fiscal policy. It impacts government borrowings and budgets. Tools used under the fiscal policy are debt, tax rates and public spending. For example, a government lowering tax rates if the consumption and demand are going down.
Conversely, monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc. is a central bank’s measure to modify interest rates and regulate the money supply in the financial system. Thus, it affects banks’ lending, consumers’ purchasing power, the housing market, exchange rates, etc. The tools employed under this policy include the discount rate, open market operations and reserve requirement.
Fiscal Policy vs Monetary Policy Infographics
We will just look at the top 8 differences between fiscal vs monetary policies.
- The fiscal policy ensures that the economy develops and grows through the government’s revenue collections and government’s appropriate expenditure. On the other hand, the monetary policy ensures that there is liquidity in the economy and the economy remains stable throughout.
- Fiscal policy is controlled by the ministry of finance of the country. Monetary policy, on the other hand, is controlled by the central bank of the country.
- The fiscal policy ensures the overall well-being of the economy. Monetary policy is a subset of fiscal policy.
- Fiscal policy is formed every year after reviewing the results of the previous year. Monetary policy is formed as per the economic conditions of the country.
- Both can be used as expansionary and contractionary policies in different conditions.
- Fiscal policy has reasonable political influence. Monetary policy doesn’t have political influence.
Fiscal vs Monetary Policy Comparative Table
|Basis for Comparison||Fiscal Policy||Monetary Policy|
|Meaning||It helps control the spending and revenue collections of the government to influence the economy at large.||Monetary policy is the tool for the central bank through which the movement and the flow of money in the economy is controlled.|
|Controlled by||Ministry of Finance of the country.||The central bank of the country.|
|Complexity||Comparatively less complex.||Comparatively more complex.|
|Nature||Fiscal policy changes every year after reviewing the previous year’s results.||Monetary policy doesn’t change as per a particular period; rather it changes whenever the economy needs the change.|
|Focus||The focus is to ensure the development and growth of an economy.||The focus of the monetary policy is to maintain the economic stability of a country.|
|Works on||Works on the government’s spending and government’s collections.||Monetary policy works on the flow of money in the economy and credit control.|
|Does it have any political influence?||Yes.||No.|
|Tools used in the policy||Tax rates, Demonetisation, etc.||Cash reserve ratios, repo rate, interest rate, etc.|
Both are very significant for the economic growth and development of a country. But they have different applications and merits and demerits. The fiscal policy serves a country through its collections of money and the right expenditure. If the fiscal policy fails, it will also affect the monetary policy of the company.
Monetary policy, on the other hand, doesn’t talk about growth or development; rather its primary purpose is to ensure enough liquidity and then curb the inflation rate and reduce unemployment. Both have their objectives and to succeed as a growing economy, both should be formed appropriately.
This has been a guide to Fiscal policy vs Monetary Policy. Here we discuss the top differences between them with infographics and comparison table. You may also have a look at the following articles to learn more –