Active Monetary Policy and Fiscal Policy
The issue of effective control is not restricted to monetary rules. When money supply has been accepted as a sub-target, any rationale supporting monetary policy implied an effective and efficient control of money supply as required. Monetary policy specifies a central bank that adheres to a rule under which the nominal interest rate rises more than anticipated when inflation rises. The proponents of monetary policy believe that it offers the nominal anchor to deliver price-level determinacy. Apparently, proponents of the fiscal approach believe that it follows a rule where taxes are used to stabilize debt. Therefore, the fiscal approach provides that the authority behind the policy is not mandated to cause any changes to the taxes in order to manage debt. In such cases, central banks are unable to stabilize the price level. As such, the fiscal policy provides the anchor for price-level determinacy through expectations concerning future surpluses, given a level of outstanding nominal liabilities (Sodha, Lister, & Institute for Public Policy Research (London, England), 2006). However, when both approaches are considered together, they yield a combination of monetary and fiscal stances, regarded as monetary-fiscal policy.
The supporters of monetary policy have the perception that it is necessary for lagging economy. Those who oppose the monetary and fiscal policies assert that policy is dictated by the ability to anticipate the economic trends (Mankiw & Taylor, 2006). In essence, fiscal policy is when a national government deploys its spending and taxing powers to observe changes in the economy. The proponents of the government spending to deal with the increase in recession posit that because tax reductions may be saved instead of channeling them to various uses, direct government spending puts more effort to raise the aggregate demand. This is the key to promoting production and employment. Apparently, critics of increases in spending or hikes believe that tax reductions may expand both aggregate demand and supply demand. In addition, it may also rapidly increased government expenditures, which may result into inefficient use of public resources, or wasteful public projects.
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According to those who support zero-inflation target focus on the fact that inflation is associated to many costs and very limited benefits (Mankiw, 2014). Nevertheless, the costs may also be reduced in case the central bank makes a public announcement with regards to an appropriate plan to minimize inflation. As such, this may directly reduce any likelihood of inflation. Consequently, while recession is necessary to minimize inflation it is very expensive. Further, the proponents points out on several ways through which moderate inflation may be helpful to the economy. The two policies can be used to influence both expansion and the contraction of the GDP.
While the government may increase the amount of debts it is providing in situations of expansionary fiscal policy, hence bond issuing may begin competing with the private sector. The other indirect consequence of the fiscal has been overlooked. Fiscal policy may be affected by the natural lag and delay in time. Consequently, monetary policy can also be used to increase or decrease in rates (Mankiw, 2014). The advocates to the notion of a balanced government budget contend that the cause of a budget deficit only imposes an unreasonable burden to the future generations. This is through tax increases coupled with lowering of the income levels. There is a very limited concern on the budget deficit, which may impede various ways through which policy, comprising of various government spending programs is critical to the economy.
The relationship between the monetary and fiscal policies has been relegated to the backbone of the macroeconomic arguments. However, the fiscal policies have been observed to be of less significance (Mankiw & Taylor, 2006). There is an underlying assumption, which states that the fiscal policy is well-behaved. As such, it reduces the government tax that are financed by the increased in debt levels. Nevertheless, financial policy may only be considered in situations where monetary policy has demonstrated that it is pointless. In such situations, the existence of inconsistencies between the monetary and the fiscal policy may be a good explanation of the prevailing systemic domestic as well as macroeconomic equilibrium.
Tax Incentives for Saving
The promotion of a healthy rate of economic growth has a very long central goal of public policy. Basically, the two broad categories of initiatives implemented are the macroeconomic measures and tax incentives. Today, the tax codes contain various provisions aimed at promoting savings and investment through growth. Nevertheless, those who support the notion of tax incentives have developed a systematic conception of the needed attributes necessary for a savings conception of the needed attributes for the strategy to be effective (Mankiw, 2014). On the other hand, the critics of tax incentives claim that there are various possibilities, which may alter the tax structure to encourage savings. Critics make no claim the even the best designed tax incentives may generate substantially higher saving rates. As such, changes may not be responsive to the changes in taxation which raises after-tax rewards.
The advocates on tax-incentives for savings claim that the contemporary society is greatly discouraging savings in various ways. For instance, savings may be discourages through imposing heavy taxes on the capital income. Further, this can also be done through reducing the benefits for individuals who have accumulated enough assets and resources. As such, the advocates of tax incentives for savings supports endorse changes in the tax laws, or reforms to encourage savings. This may be achieved through switching from income taxation to consumption taxation (Institute for Fiscal Studies (Great Britain), 2009). Ostensibly, the critics of the tax incentives for savings claim that there are various proposed changes to encourage or stimulate savings. However, these sways will only ensure that the wealthy benefit; hence thee will be no need to take a tax break. The other agreement is that such reforms may only result into a very minimal impact on savings. To summarize, for a tax incentive to be effective, it should have no inducement to change form of asset ownership with a positive incentive to allow individuals to save at the set margin.
References
Institute for Fiscal Studies (Great Britain). (2009). Dimensions of tax design: The Mirrlees Review . Oxford: Oxford University Press.
Mankiw, N. G. (2014). Brief principles of macroeconomics . Australia : South-Western
Mankiw, N. G., & Taylor, M. P. (2006). Economics . London: Thomson.
Sodha, S., Lister, R., & Institute for Public Policy Research (London, England). (2006). The saving gateway: From principles to practice . London: Institute for Public Policy Research.
