Professional Documents
Culture Documents
Monetary Policy
by Marjolein van der Veen
Fiscal Policy
Pros
If use Government spending, can direct
spending towards areas in need (e.g.
infrastructure, education, etc.), and make
investments for the future.
Using a balanced budget can provide a
stimulus without adding to the government
budget deficit.
While fiscal policy may lead to government
deficits/debt, we should look at debt/GDP
ratio. As only as GDP grows, it can bring
down the debt/GDP ratio.
Can use green taxes to discourage polluting
activities.
Cons
Knowledge problems (regarding the current
state of the economy; regarding the amount of
an expansion or contraction needed, etc.)
Government budget deficits (though theres
disagreement regarding the extent to which
deficits are a problem)
Time lags (particularly on the front end of the
process)
Monetary Policy
Pros
Can be initiated immediately
Cons
Knowledge problems (regarding the current
state of the economy; regarding the amount of
an expansion or contraction needed, etc.)
Time lags (particularly response lags)
Cant direct the spending (to particular uses,
e.g. infrastructure), and spending may be done
in wasteful ways, e.g. speculation, mergers
and acquisitions.
Very low interest rates can foster speculative
activities (such as Japans yen carry trade.)
Feds change in interest rate is applied
nationally some areas in the country might
not need the stimulus, while states with high
unemployment might need the stimulus.
Reluctant lenders (Banks may be unwilling to
lend, especially if overwhelmed by bad loans
on the books)
Reluctant borrowers (pushing on a string)
(Firms may be reluctant to borrow, especially
if expectations of future sales and profits are
low.)
Limit of r=0%, liquidity trap
While government doesnt incur debt, the
private sector is encouraged to borrow and
take on debt.
What if we have stagnation + inflation? Could
exacerbate inflation