Fiscal Policy vs. Monetary Policy: Will the Twain Ever Meet?

“Fiscal” has something to do with money. Obviously, so does “monetary.” But there’s a big difference when you put both words beside “policy.” So how does “fiscal policy” differ from “monetary policy”? And what roles do they play in the overall economy?

The first difference lies in the entity that implements them. While monetary policies are issued and implemented by central banks, such as the U.S. Federal Reserve, fiscal policies are made by the government, usually through the Congress. Both, however, are used as measures to curtail an impending economic crisis such as inflation or recession.

To illustrate, early this year, the US Congress enacted a fiscal measure, otherwise called the economic stimulus package, which granted tax cuts and rebates, as well as funding for government projects, with an end to encouraging people to spend despite the crisis.

In contrast, when the economy was rapidly shooting up in 1999 and 2000, the Federal Reserve exercised its authority to influence the amount of money in circulation by increasing inter-bank interest rates. The move was designed to hamper economic expansion and allow inflation rate to catch up. The following year, when the economy was slowing down, the Federal Reserve decreased overnight interest rates a total of 11 times to increase available money and accordingly increase demand.

The effects of both fiscal and monetary policies are meant to be short-term. They are designed to stabilize the economy and protect it against drastic movements resulting from developments in global finance and the world market. While some analysts would favor fiscal policy in combating recession or inflation, it is undeniable that the value of monetary policy lies in the fact that it can address economic concerns as they happen, giving the national government lead time to come up with more sustainable solutions.