FISCAL POLICY AND MONETARY POLICY

Fiscal policy and Monetary Policy are two economic policies that are used interchangeably. When we
talk of fiscal policy, it is the policy that affects aggregate demand through changes in government
spending and taxation. Those factors influence employment and household income, which then impact
consumer spending and investment.

On the other hand, monetary policy impacts the money supply in an economy, which influences interest
rates and the inflation rate.

In the simplest, these two concepts can be differentiated as follows:

Monetary Policy Fiscal Policy

Objectives and The Primary concern of monetary
Tools policy is the management of interest
rates and the total supply of money
in circulation
Central Banks use monetary policy
to stimulate or check the growth of
an economy. This is predominantly
done using the following tools:
 Interest rate increases or
reductions
 Increasing or decreasing the
supply of money in
circulation
 Expectations and forward
guidance are also an
important tool
Who governs the Central Banks such as the Bangko
policy Sentral ng Pilipinas which is
independent from the government
when it comes to its function
Impact on the Monetary policy has less direct
real economy impact on the real economy. It is
used to encourage or discourage
companies and individuals from
investing in economic activities
Risks Loose monetary policy can increase
money supply excessively and has
the potential to cause inflation.
Fiscal Policy uses taxation and
government spending to target
aggregate demand in an economy.
If a government believes that there is
enough business activity in the
economy, it can increase government
spending to stimulate economic activity.
Reducing taxes is another way that the
government can use fiscal economy to
increase economic activity.
In the Philippines, the executive
(President) and the legislative (Congress-
Senate and House of Representatives)
branches determine fiscal policies.
Fiscal policy has direct impact on the
real economy.
Governments typically need to borrow
to fund additional spending, which can
increase a country’s debt burden.