Monetary Policy Vs Fiscal Policy

There are two main policies that a country can follow, which are fiscal policy and monetary policy. Fiscal policy is defined as policies that the government has enforced that influence the macroeconomic conniptions in the economy. The effects of fiscal policy can differ under certain exchange rates. Monetary policy, however is when a government authority, such as a central bank, will determine the growth rate and size of that particular country's money supply. Through this system, they can change the interest rates. A good example of this is the Federal reserve bank. With both of those policies, they can follow an exchange rate that will work best in accordance with their policies. Both of these policies will work differently under both floating

The government controls and highly influences the macroeconomic conditions and overall economic standing. Fiscal policy under a fixed exchange rate regime will only boost the effects of fiscal policy (3). The government uses fiscal policy as a way to stabilize the economy and maintain interest rates. Under a fixed system, fiscal policy will gain and maintain more control over the money supply (2). Fiscal policy works well with a fixed exchange rate because the government has more control in determining the value of the currency, which can affect the interest rates. This is why fiscal policy has proven to be more effect and efficient under a fixed exchange rate. Fiscal policy proves to be ineffective and inefficient under a floating, or flexible exchange rate regime (3) When there is a rise in spending, there is an increase in the interest rates. When there is a floating exchange rate under a fiscal policy, the increase in interest rates would lead to a rise in the currency value. This will then decrease the net exports of an economy and worsen the effects of fiscal

It is very ineffective under a fixed exchange rate. Since monetary policy requires a central bank, or some form of a board that regulates the money supply, you need a system where you can control the money supply by having more freedom in an exchange rate system and more capital mobility. A flexible exchange rate regime, or a floating exchange rate works well with monetary policy because there is more capital mobility and it is used as a way to stabilize an economy with an effective monetary system (3) . A monetary policy under a fixed exchange will especially not work well with an independent monetary policy, because it limits or eliminates the capital mobility in the exchange rate regime (2). It can have a negative impact on interest rates, and may reduce trade and have an overall negative effect on a country's economy. However, a fixed exchange rate may only work under certain conditions with countries that use a monetary policy system. Countries with monetary policy that have a high or low inflation rate and/or with a poor history of monetary policy could benefit from a fixed exchange rate regime (2). They could essentially partially associate their currency to another country's currency, whose economy is thriving under monetary policy, and they could effectively maintain the other countries monetary policy system as their own (2). This could substantially improve their overall