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2010-05-23

Why do economists prefer monetary to fiscal policy?

I was always puzzled by the fact that many economists prefer using monetary policy to manage the economy to using fiscal policy to counter cyclic activities when I was learning economics. I had thought that fiscal policy could be tailed much more flexibly to suit different situations and needs, while monetary policy applies to all business, industries and households indiscriminately.

Over the last two and half years, I gradually realised the main reasons why many economists prefer that.

Governments are not as pure as people think and are politically affected in decision making. In that process, political considerations as opposed to national interests and influences of different interests groups can compromise the quality of fiscal policy to such a degree that it is ineffective and inefficient.

Incompetency by governments also plays a role, especially when they try to do different things for which they have little expertise.

Wastes can occur at an alarming scale, such as the home insulation program and the building the education revolution program in Australia over the last two years.

The end results can be the costs of fiscal policy may outweigh its benefits.

On the other hand, monetary policy has a simple objective, less politically affected and easier to implement.

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