Introduction
A country requires two policies to run its economy i.e. Fiscal Policy and Monetary Policies. Both of these policies are very crucial to steer and stabilize the economy and both the policies have different approaches to different aspects of the economy.
Fiscal policy is more concerned with government actions and generally deals with taxation and expenditure of the country. Fiscal policy involves government spending and government revenue to influence the overall economic activity and achieve macroeconomic objectives.
Monetary policy is more concerned with the money supply and interest rate of the country. The Central Bank has all the authority and is responsible for setting monetary policy as per the requirement in the economy. The main objective of the monetary policy is to maintain price stability, ensure financial stability and promote economic activity.
Fiscal and monetary policy are two very distinct and different concepts but they serve the ultimate objective of a sound and stable economy of a country. Understanding the difference between fiscal and monetary policy is essential for comprehending their role in the economy. Some of such differences are as follows.
Difference between Fiscal Policy and Monetary Policy
| Basis | Fiscal Policy | Monetary Policy |
| Definition | A fiscal policy refers to the government decisions about taxation and spending. A fiscal policy influences the overall economic activity and achieves macroeconomic objectives. | A monetary policy refers to the decision and activities by the central bank to regulate and control the money supply, interest rates and overall liquidity in the economy. |
| Objective | The major objective of fiscal policy is to influence the overall economic activity and achieve goals on economic growth, employment and stability. | The primary objective of this policy is to maintain price stability, promote economic growth, and ensure financial stability. |
| Focus | Fiscal policy focuses on managing aggregate demand and addressing economic challenges. Fiscal policy focuses on economic growth. | Monetary policy focuses on managing money supply, interest rate and liquidity in the economy. Monetary policy focuses on economic stability. |
| Authority | Fiscal policy decisions are made by the government. | Monetary policy decisions are made by the central bank. |
| Tools | Government spending and taxation are the main tools of fiscal policy. | Open market operations, reserve requirements and discount rates are main tools of monetary policies. |
| Impact | Fiscal policy measures have immediate impact on the economy. For instance, government spending can lead to increased demand and job creation. | Monetary policy measures have an indirect and lagged impact on the economy. For instance, changes in interest rates shall take time to affect borrowing and spending decisions. |
| Timing | Implementation of fiscal policy takes time as it requires due legislative process and budgetary constraints. | Implementation of monetary policy is comparatively immediate by the central bank. |
| Scope | Fiscal policy can be targeted and sector-specific i.e. it can target and address a specific issue. | The scope of monetary policy is wide and broad. It affects the overall economy. |
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