How does fiscal policy differ from monetary policy?

1 Answer
Dec 31, 2015

Fiscal policy refers to government revenue and expenditure, while monetary policy refers to the currency itself in all possible ways that it could be affected.


Fiscal policy determinates taxes (revenue) that will be imposed, be it to people, to businesses or to property, as well as the use of such resources (expenditure), on providing social services, public goods, state-owned companies and its employees and so on, wherever government has a steak.

Monetary policy aims at controlling the currency. The carrying out of such varies a lot from country to country, even though it sounds reasonable that a Central Bank will try to deffend the stability of the currency, by, for example, taking measures that will tackle inflation (specially in developing countries).

It can fix the domestic interest rate, the proportion of compulsory deposits (by commercial banks on the Central Bank), the inflation goal, the expansion of the monetary base, and carry out interventions on the exchange market, on the access to credit (make it easier or harder, in terms of financial costs), and so on.

It is important to underline that the role of government in an economy and in a society will be highly questionable depending on one's political convictions - those on the liberal wing will believe that less government (and, thus, less expenditure, less state-owned activities, less taxes and lower tax rates, etc.) is preferrable, while left-wing or socialist-like ones will deffend a more centralized and empowered government, that will end up doing the opposite. However, the view exposed in the previous paragraphs is pure macroeconomic theory with very very little ideological component.