Fiscal Policy vs Monetary Policy

Publication Date :

23 Feb, 2018

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Table Of Contents

Differences Between Fiscal and Monetary Policy

The government of any country manages fiscal policy by cutting or expanding revenue collection through direct and indirect taxes influencing the people's spending. In contrast, monetary policies are governed by the Central Bank of any country, which involves changes in interest rates and influences the nation's money supply.

Both the policies are essential for effectively running a government and promoting its economy. However, it is critical to note that monetary policy alone will not affect an economy positively. It needs to work hand in hand with fiscal policies.

The fiscal policy is a government initiative to implement tax reforms and change 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 lowers 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 requirements.

Differences Between Fiscal and Monetary Policy

Fiscal Policy vs Monetary Policy Infographics

We will look at the top 8 differences between fiscal policy and monetary policy.

Key Differences

The fiscal policy ensures that the economy develops and grows through the government's revenue collections and appropriate expenditure. On the other hand, the monetary policy provides liquidity, and the economy remains stable.
Fiscal policy is controlled by the ministry of finance in the country. On the other hand, monetary policy is managed by the country's Central Bank.
The fiscal policy ensures the overall well-being of the economy. Therefore, monetary policy is a subset of fiscal policy.
After reviewing the previous year's results, fiscal policy is formed every year. Monetary policy is created as per the country's economic conditions.
Both can be used as expansionary and contractionary policies in different situations.
Fiscal policy has a good political influence. However, monetary policy does not have a political impact.

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 are controlled.
Controlled by	The 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 does not 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.	Monetary policy does not change as per a particular period; rather, it changes whenever the economy needs the change.
Works on	Works on the government's spending and collections.	Monetary policy works on money flow 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 Ratio, Repo Rate, Interest Rate, etc.

Conclusion

Both are very significant for economic growth and development. However, both have different applications, 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.

On the other hand, monetary policy does not discuss growth or development. Rather, its primary purpose is to ensure enough liquidity to curb the inflation rate and reduce unemployment. Both have objectives, and to succeed as a growing economy, both should be formed appropriately.