Difference Between Fiscal and Monetary Policy (With Table)

To run a country or a state, the government of that area focuses on a number of aspects that can affect and aid the growth of the country. Some of such aspects are related to the economy, technology, and the social system of that country. 

Fiscal Policy and Monetary Policy are two aspects related to the economy of a country that affects economic growth at a very large level. In order to understand these two, it is important to mark a line of difference between them as they can be confusing sometimes. 

Fiscal Policy vs Monetary Policy 

The difference between Fiscal Policy and Monetary Policy is that the former is refers to the vision and planning done by the government related to the expenses, taxation, and revenue generation, while on the contrary, the latter refers to a policy set by the leading financial institution of a country with the aim of controlling and regulating the money and other related things such as the interest rate, etc. These two differ widely in their areas of operation but can be termed as co-related in a wide sense. 

Fiscal Policy can be defined as the policy in which the government decides that how it is going to spend the revenue generated in a particular period of time. This policy affects the economy at a very wide level as it directly affects all the sectors and the proposed investment in them. A very key feature of this policy is that it is proposed and regulated by the government and not any financial institution. 

On the other hand, Monetary Policy is proposed and evaluated by the principal financial institution or bank of a country and focuses upon the regulation of the flow of money in the country. It may include managing the loan and interest rates with the aim of controlling inflation or deflation, whatever the case might be. This policy is targeted towards managing the stability in the economy and helping the currency stay afloat. 

Comparison Table Between Fiscal and Monetary Policy 

Parameters of Comparison Fiscal Policy   Monetary Policy 
Meaning  It refers to the planning and propositions set by the central government of a country with the aim of keeping track of all revenues and expenditures. It refers to the system set up by the leading bank of a country aimed towards controlling inflation or deflation. 
Propounded by It is set up by the central government. It is set up by the leading financial institution or the leading bank of a country. 
Impact  It gives a vision to the economy. It controls the price and brings stability to currency and credit systems. 
Effectiveness  It happens to be less effective because of the political involvement and the personal interest of the government.  It happens to be more effective. 
Instruments  The factors and instruments controlled by this policy are the tax received and the expenditure made by the government. The factors affected by this policy are the interest rates by the banks, credit policy, etc. 
Duration  It is made for a shorter time duration. It is made for a longer time duration and serves long-term goals. 

What is Fiscal Policy? 

The Fiscal Policy can easily be understood as a government’s plan with respect to the collection and expenditure of revenue and the complete roadmap about it. The government generates capital by way of taxes that are submitted by the people. After receiving taxes, the government’s next task happens to be how this collected money should be spent to make the best of it. 

Many industries, such as education, infrastructure, medical, or real estate, etc., require funds from the government to operate in a better manner. The government then decides how the expenditure shall be made for each concern, and they plan to do is called the fiscal policy simply. 

This policy is set up by the central government of a country and clarifies that what vision foes the government holds with respect to the growth of the economy. This policy is proposed for a relatively short duration and is revised many times according to the changes in priorities and needs. 

What is Monetary Policy? 

A Monetary Policy, on the other side, is the more relevant and effective economic policy if compared to the others. It is propounded by the leading financial institution or the principal bank of a country with the intention of bringing stability to the economy by various measures. 

This policy happens to be more effective as it does not involve any political figure and can be termed free from any bias. In this policy, the bank decides the interest rates and credit control measures that help to achieve control over price fluctuation or inflation, or deflation. 

The factors affected by this policy are the interest rates by the banks, credit policy, etc. And it is made for longer time duration and serves long-term goals. Many measures are taken to effectively implement this policy, such as open market operations, bank rate change, change in reserve policy, etc. This policy is targeted towards managing the stability in the economy and helping the currency stay afloat. 

Main Differences Between Fiscal and Monetary Policy 

  1. Fiscal Policy is set up by the central government, while the Monetary Policy is set up by the financial institution. 
  2. The fiscal policy provides a clear vision to the economy of a country, while Monetary policy brings stability to the economy. 
  3. Fiscal Policy happens to be less effective than Monetary Policy because of political involvement. 
  4. Fiscal Policy is made for a shorter time duration while, on the contrary, it is made for a longer time duration and serves long-term goals. 
  5. The factors and instruments controlled by Fiscal Policy are the tax received and the expenditure made by the government. While Monetary Policy focuses on the interest rates by the banks, credit policy, etc. 

Conclusion 

A country happens to be a big deal when it comes to managing it by social, political, and economic aspects. Certain tools help those who are in authority to regulate these aspects smoothly. 

Fiscal Policy and Monetary Policy are two such tools that aid in regulating and managing the economy of a country with the help of many instruments such as taxes and expenditures. However, these two are very different from one another, and it is really crucial to have known their differences. 

References 

  1. https://www.sciencedirect.com/science/article/pii/0304393286900085
  2. https://www.jstor.org/stable/1992686
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