Fiscal and Monetary Policy

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Fiscal and monetary policy are two important tools in managing and adjusting the macroeconomy. They have different purposes. Fiscal policy refers to the revenues of state budget, financial funds and the expenditure undertaken by the government annually. The expenditure includes regular expenditure, development investment, supplement for national reserves, payment of internal and external debts. Monetary policy is one of the tools used by a central bank to control the money supply and money circulation in order to attain the objectives of macroeconomic policy. Sometimes, the fiscal policy implementation may badly affect the monetary policy implementation, and vice versa. The inconsistent coordination between fiscal and monetary policy during implementing will cause contradictions, breaking the market rule and negatively affecting the sustainable growth. Therefore, in the short-term, these two policies should be coordinated to achieve objectives of each policy orderly. In the longterm, they should be combined together to ensure the balance their objectives, accompanied with the sustainable economic growth and inflation restraint. In detailed, if the fiscal policy implementation is considered and timely coordinated with monetary policy, the attained objectives of fiscal policy will be acted as “buffer step” for implementing monetary policy. With the purposes of increasing budget revenues, reducing regular expenditure, controlling basic construction investment, etc. fiscal policy aims at balancing the state budget revenue and expenditure and then stablizing monetary, controlling inflation and deflation in the short-term and long-term. Similarly, the close coordination with fiscal policy when implementing monetary policy will create condition for increasing the state budget, reducing budget deficit, etc. I. Overview of the implementation of fiscal and monetary policy in 2009 Based on internal weaknesses of the economy and of the economic management, and the impacts of global financial crisis and economic recession, in the end of 2008 and the early 2009, there were many unbright forecasts for Vietnam’s economy in 2009. One expert *

This paper is summarized from the Working-paper No.1-2010: “Vietnam after three year of WTO membership”published by Center for Information and Documentation – CIEM.


forecasted that Vietnam would fall in the circle of crisis, a series of banks and enterprises would be bankrupted, the economy would be recessed with minus growth rate, FDI, international tourists, balance of payment would reduce significantly, etc. This forecast based on the economic situation in 2008 when the economy had to face with both internal shortcomings and two extremes “ice” and “fire”. “Ice” means the ice over the world financial market and “fire” means the extremely fluctuations in the world prices of foodstuffs, energy and metal. The rapid increases in oil price in the early 2008 made the economy confront with high inflation pressure; therefore, the government changed its objectives from economic growth to inflation controlling. Soon after 15th September 2008 – time of the global financial crisis and economic recession started, the world market heavily affected on many economic sectors in Vietnam. Again, the purposes and economic policy had to be changed, from inflation controlling to economic recession prevention and investment and consumption stimulation. When the economic growth had bottomed out in QI/2009, the objective of “the maintenance and recovery of growth rate” was added to the objective of “economic recession prevention”. Since the early December 2009, in order to prevent the high inflation return, macroeconomic stability and inflation prevention have been...
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