Question

The architects of monetary and fiscal policy seek to use the tools at their disposal to meet macroeconomic policy objectives. Discuss some of the challenges – specifically around the timeliness and accuracy of data – that they face in trying to decide what policies to implement. Are there additional timing challenges unique to fiscal policy (but that monetary policy makers can avoid)? Given all these challenges, what do you think policy makers should do going forward?

When you make your initial post, please fully answer the question and make substantive responses - i.e. at least 400 words that really dive into the topic and show that you've read the text and done research to support your opinions.

Answer 1

Challenges for Monetary Policy

1) The Decision on monetary policy is taken by Central Bank . Central Bank can't cover all financial stability aspects. To achieve the financial stability, it is necessary to identify potential risks.

2) To support the economic growth. During low economic growth, to increase the aggregate demand, Central bank adopts the expansionary monetary policy.

3) One of the main challenge of central bank is to preserve the financial system stability during crisis. During crisis, solvency and liquidity of the financial sector are problems and central bank need to find the approaches to implement the monetary policy. During the crisis, a central bank enable commercial bank the access to "cheap" liquid funds so that it can preserve the stability.

Challenges for Fiscal Policy

1) Due to high expansionary fiscal policy, it is difficult to calculate the fiscal deficit.

2) To decrease the inflationary pressure, the government reduces the spending which affect the public services.

3) Lack of wrong information lead to wrong budget estimation.

4) Macroeconomic fluctuations happens due to supply shocks and technological progress.