Monetary and fiscal policy coordination

SUPPLEMENTARY READING

SPEECH PRACTICE

1. Read the text below to learn about some criticism on the fiscal policy. Entitle the text. Use this information to discuss the ways the government can choose to cover the budget deficit.

Some economists believe that fiscal policy solutions have several serious drawbacks:

· When government reduces taxes to fight a recession, it often creates a budget deficit. That is its revenues will be less than its expenditures, and the government’s debt will increase. When taxes are reduced the government can still spend because it can borrow or print money.

· If the government chooses to borrow from the public to compensate a tax reduction, the money it borrows cannot be spent by the lenders.

· The government can also finance its debts by printing money. Unfortunately, such increases in the money supply tend to fuel inflation by pushing up prices. For that reason a number of economists are opposed to this strategy.

2. Speak on the essence of the fiscal policy and the consequences of its implementation for consumers and businesses.

3. Speak on the essence of the monetary policy and the consequences of its implementation for consumers and businesses.

Monetary and fiscal policies affect real output. The Central Bank controls monetary policy. The President and the Government control fiscal policy. Ideally, however, these two types of macroeconomic policy should be coordinated. Suppose, for example, that a decline in government spending is planned in order to reduce the budget deficit. Real output will fall in the short run. A coordinated monetary policy could be used to offset the fall in real output. Just the right amount of a reduction in the interest rate, brought by an increase in the money supply would increase output in the short run by just enough to offset the decline in output brought about by the cutback in government spending. The right amount of the decline in interest rates can even be calculated.

Recent research on rational expectations says that these calculations would need to be modified if the decline in the budget deficit were to occur in the future and if it were anticipated in advance. With a credible pledge to reduce the budget deficit in the future, people would figure that interest rates in the future would decline. But if future interest rates were expected to decline, then long-term interest rates would decline right away. Long-term interest rates are affected by expectations of future short-term interest rates. In any case, the decline in long-term rates would increase the demand for investment and thereby begin to offset the contractive effects of monetary policy right away.

Analysis of real life situations shows that such empirical macro models do not affect the policy decision as much as they were expected.

Дата добавления: 2014-11-29