Policy mix

The policy mix is the combinaison of the monetary policy and the fiscal policy of a country. These two channels influence growth and employment, and are generally determined by the central bank and the government respectively.

Ideally, the policy mix should aim at maximizing growth and minimizing unemployment. In fact, the central banks and governments have different time horizons, with the elected governments having a shorter time range. Both can have other objectives and must apply to some constraints, diverting them from these primary objectives : obeying a deficit rule, securing the financial sector, courting popularity, etc.

The monetary policy is accomplished by the central bank which, by the control of interest rates and the money supply, is due to avoid inflation. The government choose the taxes' level and sharing out, determinne public investment and public spending.

The independent actions of the government and the central bank could result in a mix of uncoordinated policies, as both fiscal and monetary forces attempt to pull the economy in opposite directions. This independance is good because it prevents a unique authority from paying off deficits by printing money, which would result in the long run in severe hyperinflation [The Monetary-Fiscal Policy Mix, page 1] .

References

Sources

* [http://www.cato.org/pubs/journal/cj21n2/cj21n2-11.pdf THE FISCAL-MONETARY POLICY MIX] , Alan Reynolds, "Cato Journal", Vol. 21, No. 2, Fall 2001.
* [http://www.theshortrun.com/studies/policy_mix.pdf The Monetary-Fiscal Policy Mix] , Alexander D. Rothenberg