Fiscal policy vs Monetary policy

 Fiscal Policy Vs Monetary Policy

The divergent views on the relationship of money supply and level of economic activity resulted in the formulations of different sets of policies for the control of economic oscillations. The doubts have been frequently raised about the monetary policy from the angles of its effectiveness, the desirability of the ways in which the policy works and the value of the actual compatibility of its aims. 

A very significant factor which affects the effectiveness of monetary policy is the duration of the lags of monetary policy. In addition, there are certain institutional difficulties in the effective operation of the monetary policy. The effectiveness of the monetary policy is also limited by the decisions of the individuals and business units about the income, spending and assets. Still another factor to account for the limited efficacy of the monetary policy is inflation and particularly the cost push inflation. 

The fiscal policy too has its weaknesses. It is often considered to be quite rigid, insensitive and cumbersome.Anderson and Jordan laid down, tests to know the relative effectiveness of monetary policy and fiscal policy. On the basis of strength, predictability and promptness they found that monetary policy has a relatively greater effectiveness than the fiscal policy. 

Now the attitudes of the two divergent groups of economists have been considerably softened. An appropriate monetary - fiscal policy must be evolved for the achievement of different macroeconomic goals. 

During the period of boom or inflation, the fiscal restraints are likely to generate greater unemployment.

Therefore, the monetary action is likely to tackle the situation much more effectively. The expansion of income and output and the maintenance of price stability can be ensured through a proper mix of monetary and fiscal action. When the economy is in a state of recession or depression, the easy money supply should be supplemented by a policy of tax reduction and expansion in government expenditure. When the system is close to a boom, the greater reliance upon monetary rather than fiscal action can yield desired results. For achieving other goals fiscal policy is more powerful than monetary policy.