Difference between Monetary Policy and Fiscal Policy

Monetary policy and fiscal policy are two different tools that have an impact on the economic activity of a country.

Monetary policies are formed and managed by the central banks of a country and such a policy is concerned with the management of money supply and interest rates in an economy.

Fiscal policy is related to the way a government is managing the aspects of spending and taxation. It is the government’s way of stabilising the economy and helping in the growth of the economy.

Governments can modify the fiscal policy by bringing in measures and changes in tax rates to control the fiscal deficit of the economy.

Below are certain points of difference between the monetary and fiscal policy

Monetary Policy

Fiscal Policy

Definition

It is a financial tool that is used by the central banks in regulating the flow of money and the interest rates in an economy

It is a financial tool that is used by the central government in managing tax revenues and policies related to expenditure for the benefit of the economy

Managed By

Central Bank of an economy

Ministry of Finance of an economy

Measures

It measures the interest rates applicable for lending money in the economy

It measures the capital expenditure and taxes of an economy

Focus Area

Stability of an economy

Growth of an economy

Impact on Exchange rates

Exchange rates improve when there is higher interest rates

It has no impact on the exchange rates

Targets

Monetary policy targets inflation in an economy

Fiscal policy does not have any specific target

Impact

Monetary policy has an impact on the borrowing in an economy

Fiscal policy has an impact on the budget deficit

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