Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol.

Monetary policy

In economics, monetary policy is the set of objectives, instruments and actions taken by a state to modify and direct money, credit and finance in order to achieve set economic policy objectives, of which monetary policy is a part.

Objectives of a monetary policy are divided into final objectives and intermediate objectives. Final objectives are the same as those of economic policy (prices, employment, development). Monetary policy is concerned with achieving one or more objectives by maneuvering monetary variables (interest rate or quantity of money). Usually, the main objective entrusted to monetary policy is price stability. Indeed, it has been observed that the pursuit of this objective is the greatest contribution that monetary policy can make to economic growth in the medium term.

Since, however, the price level is not directly maneuverable by the central bank, it has been theorized that intermediate targets need to be set. The intermediate target must have the following characteristics:

  • possibility of timely detection of its level (very small information lags);
  • Controllability within very narrow limits and with the tools available to the authorities;
  • stability of the relationship between intermediate target and final target.

However, the choice of the intermediate target and, more generally, of the monetary policy regime to be adopted, depends heavily on theoretical assumptions about the transmission mechanisms of monetary impulses. The two main monetary policy regimes are monetary targeting and inflation targeting.

Fiscal policy

Fiscal policy, in economic policy, is one of the courses of action taken by a government within budgetary policy. It is expressed in the budget law, to meet government budget objectives in a predetermined manner, that is, to set a level of taxation or tax levy on taxpayers to cover the predetermined share of government expenditures (government spending).

These results are achieved through changes in the so-called tax system, defined as the average level of tax burden and the way in which taxes are distributed to the taxpayers themselves. In general, if the level of tax burden is kept unchanged in order to achieve certain budget targets, any tax cut on one side is matched by an increase or creation of others. A typical and severely limiting problem that a government often faces in taxation to try to achieve its budget goals is that of tax evasion.

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