Monetary Policy - Advantages and Disadvantages of Two Policies

Monetary policy is typically implemented by a central bank, while fiscal policy decisions are set by the national government. However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run of a country. The principle aim of fiscal and monetary policy is also to reduce cyclical fluctuations in the economic cycle. Often it is inflation targeting which is stressed most for monetary policy (Lowe. P, 1997). In short definition, Fiscal Policy involves changing government spending and taxation. It involves a shift in the government's budget position. For example, expansionary fiscal policy involves tax cuts, higher government spending and a bigger budget deficit. However, monetary policy involves influencing the demand and supply of money, primarily though the use of interest rates. It can also involve unorthodox policies such as open market operations and quantitative easing (Lowe. P, 1997).

Advantages and Disadvantages of two policies

However, the pro and cons for fiscal policy, disadvantages are more than the advantages. In the advantage part, if use the government spending, we can directly spending towards areas in need such as infrastructure, education and make investment for future. In opposite of that, knowledge become an issue regarding the state of economy and the amount of an expansion or contract needed. By using a balanced budget it can also provide a stimulus without adding to the government budget deficit, somehow the problem always come from the government of disagreeing regarding the extent to which deficits problem. While fiscal policy may lead to government deficits or debt, we can see the debt ratio as only the GDP (Gross Domestic Product) grows, it can bring down the debt but the disadvantage is time lags.

On the monetary policy side, the policy can initiated immediately but knowledge problem arise again same as in fiscal policy. The expansionary of policy leading to depreciating currency can stimulate exports and it can't directly spend to particular uses such as infrastructure and spending may be done in wasteful ways for example speculation, mergers and acquisitions. It also disadvantages and risky state while government does not incur debt hence the private sector is encouraged to borrow and take on debt. Another advantage of monetary policy is the Fed is theoretically insulated from the political process. But somehow, some activities are foster at very low interest rate such as Japan's Yen currency trade.