The Central Bank should not base too many its declarations on the budget deficit size. Thus we have inflation only when we have "overcooling" and not "overheating". The conclusion is that the price stability should be assigned to the monetary policy and the fiscal policy should be focused in a microeconomic view of the economy.
He begins with a short overview of the macroeconomics opinion during the postwar era. Fiscal policy is most effective in a deep recession where monetary policy is insufficient to boost demand.
This caused a big rise in government borrowing But an increase in productivity cannot be inflationary because this will reduce the costs of production.
Monetary stimulus is defined as the extent of the purchases of Treasury Bonds by the Central Bank.
If we have a restrictive monetary policy this will cause deflation. Free market economists argue that higher government spending will tend to be wasted on inefficient spending projects.
In his paper Reynolds, he tries to explain the significance of the Central Bank policies and criticizes the so called fiscalists. He explained this with the logic that the federal deficit was fully offset by a reduction in private savings and vice versa Reynolds,p.
Thus if we have a fiscal restraint and a monetary stimulus we should have no real impact on real GDP growth. If there is concern over the state of government finances, the government may not be able to borrow to finance fiscal policy.
The main idea behind this policy was that the budget surplus caused a high economic growth. Also, it can then be difficult to reduce spending in the future because interest groups put political pressure on maintaining stimulus spending as permanent. The fiscalists use a mathematical model and their conclusions are derived from these models rather than the actual data.
The Keynsianists approach to increase the level of national income was to stimulate demand. The explanation of this fact is related to the lag impact of the real repo rate on the real GDP growth. But the fact gives different conclusions. One other aspect is the intervention in the case of Natural Monopolies.
He tries to explain the old idea that monetary and fiscal theory is interchangeable. The influence in the interest rate is minimal.If monetary policy is described as a blunt instrument then fiscal policy is a precision tool that can target particular sectors of the economy and population in order to achieve the desired economic changes.
ESSAYS ON EFFECTS OF FISCAL POLICY ESSAYS ON EFFECTS OF FISCAL POLICY ON ECONOMIC ACTIVITY Essay 1: Growth and Government Expenditure Level fiscal and monetary policy had roughly equal importance, in the past three decades monetary policy took supremacy over the fiscal policy (Blanchard, Dell’Ariccia, and.
Monetary & Fiscal Policy The purpose of both monetary and fiscal policies is to create a more stable economy, characterized by positive economic growth and low inflation. During the last economic and financial crisis that started in Augustthe Portuguese economy was caught in the middle of a period of adjustment during which "was already facing up to the need to correct its fiscal and external imbalances within a phase of low growth with pro-cyclical policies" (Torres,p).
Analysis of Alan Reynolds' "The Fiscal-Monetary policy mix" Overview. There are two kinds of policies that can be used in a macroeconomic view, the monetary policy that is implemented by the Central Bank and Fiscal Policy that is. Use of Monetary Policy and Fiscal Policy During The Great Recession Essay - How can monetary policy and fiscal policy greatly influence the US economy.
Keynesian economics says, “A depressed economy is the result of inadequate spending.”.Download