Fiscal Policy vs Monetary Policy

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 is a government policy that is used to control a country's finances and revenue, and it includes various taxes on goods, services, and individuals, i.e., revenue collection. It has an impact on spending levels, so it is referred to as monetary policy's sister policy.read more 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 policy 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

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Fiscal Policy vs Monetary Policy Infographics

We will just look at the top 8 differences between fiscal vs monetary policies.

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Key Differences

  • 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.

Conclusion

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.

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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 –

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Comments

  1. AHISHAKIYE Aimé Pacifique says

    Wawooo! As a young and growing economist, I feel blessed to read this thing. In last two week I was being interviewed by the central bank’s recrutment team and they asked me the difference between the ministry of finance and central bank. At the spot, I couldn’t easily remember these 2 king words, that is Monetary and fiscal policy immediately though I tried and defended myself in another way. I now see that I didn’t do it in the right way. I could have simply focused my answer on the monetary policy and fiscal policy and then I close.

  2. Mahmoud Farouk says

    Your articles are so interesting and helpful

    • Dheeraj Vaidya says

      Thanks for your kind words!