Fiscal policy and monetary policy can complement each other from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
Fiscal policy and monetary policy operate through different channels but can work together to achieve common goals. Fiscal policy involves changes in government spending and taxation, which directly impact aggregate demand in the economy. On the other hand, monetary policy involves changes in the money supply and interest rates, which affect borrowing, spending, and investment decisions. When the economy is in a downturn, policymakers may use expansionary fiscal policy to stimulate economic activity by increasing government spending or cutting taxes. This injection of demand can help boost overall economic output and employment levels. However, fiscal policy may not always be sufficient to address economic challenges on its own. Monetary policy can complement fiscal policy by adjusting interest rates to influence borrowing and spending decisions. When interest rates are lowered, consumers and businesses are more likely to borrow and spend, which can further stimulate economic growth. By coordinating fiscal and monetary policy actions, policymakers can enhance the overall effectiveness of their efforts to stabilize the economy. Conversely, in times of inflationary pressure, policymakers may use contractionary fiscal policy to reduce aggregate demand and control rising prices. At the same time, central banks can raise interest rates through monetary policy to curb excessive borrowing and spending. By working in tandem, fiscal and monetary policy can help maintain price stability and sustainable economic growth.- Coordination is essential to avoid conflicting actions that could undermine their effectiveness. Effective communication and collaboration between fiscal authorities and central banks are crucial to ensure that policy measures are aligned and mutually reinforcing. By leveraging the strengths of both policy tools, policymakers can better address economic challenges and promote overall stability and prosperity.
