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In this presentation I will discuss whether or not the South African fiscal and monetary policy are complimentary or not. We need to first define both the fiscal and monetary policy in their economic sense. Firstly, the formal definition of the monetary policy are all the deliberate steps of the monetary authority to affect monetary aggregates such as the money supply, the availability of credit, and interest rates in order to influence monetary demand, income, production, prices and the Balance Of Payments (Frederick C v N Fourie, Phillip Burger, 2009, 349). Monetary policy is the responsibility of the Reserve Bank ( as the monetary authority). The Reserve Bank is also responsible for the exchange rate policy. Exchange rates are closely interwoven with interest rates and monetary conditions that this area is seen and managed as an integral part of the monetary policy. Fiscal Policy is defined as all the efforts of government to use changes in government expenditure, taxation (including transfers) and government borrowing to influence aggregate expenditure in order to influence production, income, inflation and the Balance Of Payments (Frederick C v N Fourie, Phillip Burger, 2009,375). Fiscal policy is the responsibility of the government ( as the fiscal authority). Whether or not these two policies are complimentary has spurred huge debates, especially from 2002 right up until the present day. In contemplating the different policy steps in order to affect the standard macro economic variables, a basic consideration of the different macro economic impacts and side effects of the monetary and the fiscal policy. A comparison of the basic macro economic effects of the fiscal and the monetary policy results in contrasts and may not always be complimentary.
Monetary VS Fiscal Policy
A fiscal expansion imposed by the government via increased government expenditure can enlarge the share of the enlarge the share of the public sector in the economy relative to that of the private sector, especially if crowding out occurs. An expansionary monetary such as a increase in the money supply has a downward effect on interest rates. This is most likely to have a upward effect on investments and capital formation, which in turn will increase total expenditure and also encourage total production which will eventually increase national income and gross domestic product. At the same time an expansionary fiscal policy such as an increase in government expenditure is most likely to cause an upward pressure on interest rates which in turn will have a downward effect on capital formation which will also decrease total expenditure and total production which in turn will discourage national income and decrease national income. In this way, the expansionary fiscal option in this case puts constrain on the production capacity growth in the long run, while the expansionary monetary policy option may be promoting growth. This shows that there is conflict between the monetary and fiscal policy and that they are not always complimentary. in designing a policy package, both fiscal and monetary authority policy makers have to balance these considerations carefully, as one variable affects another by taking the current conditions and forces of the economy into account. In reality, there is no choice in using either a fiscal policy or a monetary policy because both policies are applied regularly. This raises the issue that different institutions are responsible. The reserve Bank is responsible for the monetary policy and the government is responsible for the fiscal policy. Therefore, there should be a policy mix and co-ordination between the two policies. Generally speaking, it is more desirable to have the two different policies to be complementary although it is not always the case. It does sometimes...