M&F Policy During Crisis

IIM Tiruchirappalli |

Monetary and Fiscal policy during Crisis |

Prasenjit Debnath |

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Sec – BRoll No. - 1301082 |

11/29/2013 |

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The financial crisis and recession of 2008 had prompted monetary and fiscal policymakers to take unconventional and aggressive actions. Monetary policymakers resorted to quantitative easing. Fiscal policymakers on the other hand increased government spending and reduced taxes. To exactly understand why the policymakers took such debatable actions, it is beneficial to know the underlying intent of the decisions and the separate features and functions of monetary and fiscal policy. Of lately, all advanced economies have witnessed a “series” of crises which had a tremendous impact on the financial system and the global economy at large. For the Euro zone, the last few years have been especially turbulent. The situation of sovereign debt in some Euro zone Member States is at the midst of concerns about financial and economic stability in the Euro zone.

One of the most important anchors of this framework is an independent authority primarily entrusted to deliver stability in prices. However, appropriate monetary policy strategy and actions by the central bank are not necessarily sufficient to maintain macroeconomic stability. Stability also needs an appropriate fiscal policy, a credible statement of commitment by the government to ensure that corrective measures would be in place to offset any temporary increases in deficit. So, the second anchor of a monetary union is the fact that a government that is committed to maintaining solid public finances.

Before the 1930s, believers of “CLASSICAL” economics generally believed that economic downturns would correct themselves with minimal or no government intervention. But, the Great Depression taught a great lesson to economists and policymakers to rethink classical economics and give more importance to policy intervention. Since then, Monetary and fiscal policies served as the...