Question

How has monetary policy and the fiscal policy been used recently and what is the value of their future use?

Answer 1

Before going to the actual answer, let me briefly explain what monetary and fiscal policies are:

Monetary policy is a policy, which is formulated and implemented by the central bank of that particular country, through controlling the supply of credit in the economy by changing interest rates by using the tools like, open market operations, reserve requirements and discount rate. The main objective or the goal of a monetary policy is to maintain price stability in the economy. There are two types of monetary policies. They are: expansionary monetary policy and contractionary monetary policy.

Fiscal policy is a government policy, which is formulated and implemented by the government of a particular country, by changing its expenditure and taxes. The main objective or the goal of fiscal policy is to maintain full employment levels in the economy and optimum allocation of resources for economic growth. There are two types of fiscal policies. They are: expansionary fiscal policy and contractionary fiscal policy.

Recent usage and future of monetary policy

In the recent past the monetary policy has been very unconventional with lot of changes. The best example can be of quantitative easing (QE), and purchase of different financial assets from commercial banks. QE proved to be very efficient in achieving the intended objective. During 2008 to 2013, the balance sheet of Fed was loaded with mortgage backed securities and treasury notes worth trillions of dollars. Same kind of policies have been adopted by major central banks in the world like, The European Central Bank, The Bank of England, and The Bank of Japan. According to a research done by European Central Bank, flexible inflation targeting would be the key objective of the monetary policy for many countries in future also. According to the requirements in the liquidity, there can be new monetary policy instruments in future, which might be unconventional.

Recent usage and future of fiscal policy

The present state of fiscal policy of US government is mainly determined by the reaction to the global financial crisis and the government transfers’ expansion. The fiscal policies and measures taken to reduce the impact of global financial crisis caused unexpected levels of fiscal deficits. These deficits indicate accumulation of debts. A recent survey by Congressional Budget Office (CBO) estimated that by 2026, the debt will reach 85.6% of GDP, which is a very serious issue for the economy. In the US, the expenditure on health care and social security are expected to grow more. According to a survey, the outlays on health care and social security will be 11.3% on an average in the next decade. The fiscal deficits would continue and the debt is expected to grow. Revenues from the individual income taxes will not grow as expected.