Define monetary and fiscal policy .explain their interdependances in a country
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Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the U.S. Federal Reserve. Fiscal policy is the collective term for the taxing and spending actions of governments.
Some of the key insights in our understanding of the link between fiscal and monetary policies were articulated in an influential 1981 paper by Thomas Sargent, an economist at NYU and 2011 Nobel laureate, and by Neil Wallace, an economist at Penn State.1
Arguably, one of the main roles of any central bank is to manage the inflation rate. Inflation erodes the real value of nominal assets and is, therefore, costly to society. However, when a government issues bonds in its own currency, inflation alleviates the financial burden of inherited debt. Thus, central banks have a natural incentive to finance past deficits by using inflation to reduce the real value of government debt.
Some of the key insights in our understanding of the link between fiscal and monetary policies were articulated in an influential 1981 paper by Thomas Sargent, an economist at NYU and 2011 Nobel laureate, and by Neil Wallace, an economist at Penn State.1
Arguably, one of the main roles of any central bank is to manage the inflation rate. Inflation erodes the real value of nominal assets and is, therefore, costly to society. However, when a government issues bonds in its own currency, inflation alleviates the financial burden of inherited debt. Thus, central banks have a natural incentive to finance past deficits by using inflation to reduce the real value of government debt.
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