Monetary Policy and Politics

Why is monetary policy easier to conduct than fiscal policy in a highly divided national political environment?

1. Monetary policy is usually implemented by independent monetary authorities. For example, in UK, monetary policy is implemented by MPC. Therefore, they can take politically unpopular decisions such as increasing interest rates to reduce inflationary pressure. When governments set interest rates, it was a highly charged political decision. e.g. industry lobbying for rate cuts to avoid unemployment.
2. Fiscal Policy involves changing levels of taxation and spending. For example, deflationary fiscal policy may involve cutting spending. But, it is difficult to find a department willing to have its spending cut to help the macroeconomy.
3. Increasing taxes will be unpopular no matter which tax you choose
4. Expansionary fiscal policy is also not without difficulties. Cutting taxes to boost aggregate demand will be politically popular. But, then the government finds it difficult to reverse the tax cut when the economy starts to grow against.
5. However, monetary policy is not without its difficulties. e.g. changing interest rates impacts on the exchange rate and therefore exporters. Higher rates hurt borrowers, but, benefit savers.

An evaluation of MPC in controlling interest rates