Abstract This article examines the new consensus that fiscal policy should have no macroeconomic role in 'flexible inflation targeting' regimes. There is little basis for this presumption. Fiscal policy remains important in setting the policy mix and in managing shocks and imbalances. The credibility of an inflation-targeting regime should be enhanced rather than reduced if fiscal policy plays its proper role. It is true, nevertheless, that the costs of focusing fiscal policy narrowly on public-sector concerns may not be very great, most of the time. However, when interest rates cannot be used, the role of fiscal policy must be different. With interest rates at their lower bound of zero, there is no plausible alternative. For asymmetric shocks and adjustments in EMU, fiscal policy needs, ideally, to substitute for the interest-rate policy reaction function of the consensus, but the difficulties are very great. We suggest a policy focus on real exchange rates as a way of resolving some of the dilemmas. There is a serious danger that orthodox views about fiscal policy, drawn from the consensus, will be inappropriately applied, especially in Europe. Show Journal Information Each issue concentrates on a current theme in economic policy, with a balance between macro- and microeconomics, giving a valuable appraisal of economic policies worldwide. While the analysis is challenging and at the forefront of current thinking, articles are presented in non-technical language to make them readily accessible to all readers (such as government, business and policy-makers, academics and students). It is required reading for those who need to know where research is leading. Publisher Information Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. OUP is the world's largest university press with the widest global presence. It currently publishes more than 6,000 new publications a year, has offices in around fifty countries, and employs more than 5,500 people worldwide. It has become familiar to millions through a diverse publishing program that includes scholarly works in all academic disciplines, bibles, music, school and college textbooks, business books, dictionaries and reference books, and academic journals. Rights & Usage This item is part of a JSTOR Collection. 2023 Curriculum CFA Program Level I Economics IntroductionThe economic decisions of households can have a significant impact on an economy. For example, a decision on the part of households to consume more and to save less can lead to an increase in employment, investment, and ultimately profits. Equally, the investment decisions made by corporations can have an important impact on the real economy and on corporate profits. But individual corporations can rarely affect large economies on their own; the decisions of a single household concerning consumption will have a negligible impact on the wider economy. By contrast, the decisions made by governments can have an enormous impact on even the largest and most developed of economies for two main reasons. First, the public sectors of most developed economies normally employ a significant proportion of the population, and they are usually responsible for a significant proportion of spending in an economy. Second, governments are also the largest borrowers in world debt markets. Government policy is ultimately expressed through its borrowing and spending activities. In this reading, we identify and discuss two types of government policy that can affect the macroeconomy and financial markets: monetary policy and fiscal policy. Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy. By contrast, fiscal policy refers to the government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time. They can be used to accelerate growth when an economy starts to slow or to moderate growth and activity when an economy starts to overheat. In addition, fiscal policy can be used to redistribute income and wealth. The overarching goal of both monetary and fiscal policy is normally the creation of an economic environment where growth is stable and positive and inflation is stable and low. Crucially, the aim is therefore to steer the underlying economy so that it does not experience economic booms that may be followed by extended periods of low or negative growth and high levels of unemployment. In such a stable economic environment, householders can feel secure in their consumption and saving decisions, while corporations can concentrate on their investment decisions, on making their regular coupon payments to their bond holders and on making profits for their shareholders. The challenges to achieving this overarching goal are many. Not only are economies frequently buffeted by shocks (such as oil price jumps), but some economists believe that natural cycles in the economy also exist. Moreover, there are plenty of examples from history where government policies—either monetary, fiscal, or both—have exacerbated an economic expansion that eventually led to damaging consequences for the real economy, for financial markets, and for investors. The balance of the reading is organized as follows. Section 2 provides an introduction to monetary policy and related topics. Section 3 presents fiscal policy. The interactions between monetary policy and fiscal policy are the subject of Section 4. A summary and practice problems conclude the reading. Learning OutcomesThe member should be able to:
SummaryIn this reading, we have sought to explain the practices of both monetary and fiscal policy. Both can have a significant impact on economic activity, and it is for this reason that financial analysts need to be aware of the tools of both monetary and fiscal policy, the goals of the monetary and fiscal authorities, and most important the monetary and fiscal policy transmission mechanisms.
How does government use fiscal policy?Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty.
How does the government typically use fiscal policy to improve the economy?Fiscal policy tools are used by governments to influence the economy. These primarily include changes to levels of taxation and government spending. To stimulate growth, taxes are lowered and spending is increased. This often involves borrowing by issuing government debt.
How fiscal policy affect the macroeconomic aspects of the economy?1. How Does Fiscal Policy Affect the Macro Economy? Fiscal policy affects aggregate demand, the distribution of wealth, and the economy's capacity to produce goods and services. In the short run, changes in spending or taxing can alter both the magnitude and the pat- tern of demand for goods and services.
What are the 3 goals of using fiscal policy?The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of economic growth, and to stabilize prices and wages.
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