cafeconomics

The interaction between monetary and fiscal policies can't be clearly delineated into neatly divided quadrants but one can broadly capture the policies and their impact on the economy as shown in the chart below.  Impact of Fiscal and Monetary measures: The impact of fiscal spending/contraction has a time lag when compared to monetary policy. The impact of fiscal measures is more targeted, long lasting and the multiplier effect is much bigger when compared to monetary measures. Monetary authorities are much more nimble footed when compared to their fiscal counterparts but their impact is only short term in nature.  State of the Economy:  Both fiscal and monetary authorities respond depending on the current state of the economy - expansion, recession or stagflation etc. The following paragraphs describe each of the scenarios outlined in the quadrants above.  Q1 - Both fiscal and monetary policies are expansionary: When the economy is going through a protracted downtu...

 Economists are talking about a hard landing for the US economy and the impact will be heard everywhere around the world. With the Fed signalling tightening of interest rates we can expect further flight of capital in the coming year or so. From an emerging markets perspective, there will be severe downside pressure on their currencies. In this context, we must note that, contrary to popular perception a depreciating rupee is not always bad for the economy. Yes, there is short term pain in terms of spill over effects of high priced fuel imports on inflation and therefore the impact on common people. The inflation rate for the full year is expected to be well above  6%. And let's face it India has sufficient forex reserves to tide over any balance of payments situation quite comfortably. From the perspective of energy needs, our government has taken up strategic initiatives to increase fuel imports from Russia at costs, that are significantly lower to the market price. The key ...