Monetary Policy

Abstract

Part of the story in this chapter is of the increasing domestic ascend- ancy of monetarypolicy relative to fiscal policy. Monetarypolicy came to be seen as a better mechanism for economic stabilization, given that it is easier to reverse than spending increases or tax cuts. It is easier to cut taxes than to raise them, and, in addition, fiscal policy can be slow to deliver results and they can be unpredictable. Attempts to tackle a short-term demand deficiency may lead to long-term problems:

Whereas in general in the 1950s and 1960s changes in fiscal and monetary policy were not closely related, the adoption of targets for monetary aggregates led to explicit co-ordination in the 1980s and the increased importance of exchange-rate considerations dominating monetary policy. (Burnham, 2001, p. 132)

Monetary policy is undertaken by the government in order to affect macroeconomic variables such as output, employment and inflation. It involves controlling the quantity of money in existence, or its rate of growth, either by controlling the supply of money or the demand for money via the interest rate, i.e. the price of money. (Griffiths and Wall, 1993, pp. 401–2)