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 the Monetary Policy Committee of the Bank of England. 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. Governments would often be tempted to cut interest rates before an election.
  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 macro-economy. Spending cuts tend to be very politically unpopular.
  3. Increasing taxes will be unpopular no matter which tax you choose.
  4. Increasing income and corporation tax may also have supply side effects, e.g. increasing income tax may reduce incentives to work, it could even encourage the rich to go and live abroad.
  5. 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.
  6. 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.
  7. Fiscal policy may also be limited by a budget deficit. For example, in a recession, there may be a need for expansionary fiscal policy, but this would cause higher borrowing which might be unsustainable. This is particularly a problem in the Euro-zone where government borrowing can cause problems for other Euro zone members.

Related

1 thought on “Monetary Policy and Politics”

  1. hi
    can u explain the key differences between the following types of consumers –
    economic/veblen/galbraith/routine/douglas/passive/active/marshall.

    many thanks

Comments are closed.

Item added to cart.
0 items - £0.00