| Definition |
Policy used by a country’s central bank to control money supply and interest rates. |
Policy used by the government to influence the economy through taxation and spending. |
| Authority |
Implemented by the central bank (e.g., RBI in India, Federal Reserve in the U.S.). |
Implemented by the government (Ministry of Finance or Treasury). |
| Main Tools |
Repo rate, reverse repo rate, CRR, SLR, open market operations (OMOs), etc. |
Taxation policies, government spending, subsidies, public borrowing. |
| Objective |
Control inflation, stabilize currency, maintain employment, and promote economic growth. |
Influence economic growth, redistribute income, reduce unemployment, and stabilize the economy. |
| Frequency of Change |
Can be changed frequently, even monthly or quarterly. |
Usually changed annually (e.g., during budget), or in exceptional cases. |
| Response Time |
Quick implementation and market response. |
Slower to implement due to legislative procedures and budgeting. |
| Inflation Control |
Primary tool for controlling inflation via interest rate adjustments. |
Indirect impact on inflation through demand-side spending or tax policy. |
| Economic Focus |
Primarily focuses on controlling liquidity and cost of capital. |
Focuses on aggregate demand by adjusting public revenue and expenditure. |
| Types |
Expansionary (lowers rates to increase money supply) and contractionary (raises rates to curb inflation). |
Expansionary (increased spending/lower taxes) and contractionary (reduced spending/higher taxes). |
| Decision Process |
Decided by central bank's monetary policy committee or board. |
Decided by elected government; may require legislative approval. |
| Effect on Budget |
Does not directly affect government budget or deficit. |
Direct impact on fiscal deficit/surplus based on revenue and spending. |
| Public Debt Involvement |
Usually not associated with direct public debt creation. |
Involves borrowing when expenditure exceeds revenue, increasing public debt. |
| Target Sector |
Targets overall financial system and banking sector. |
Targets specific sectors like infrastructure, health, education through allocation. |
| Market Sentiment |
Impacts interest rate-sensitive sectors (e.g., real estate, banking). |
Impacts broader sentiment depending on tax changes or government spending announcements. |
| Lag Effect |
Short to medium-term lag (effects felt within months). |
Medium to long-term lag (policy may take years to show full impact). |
| Accountability |
Central banks are independent and accountable to parliament or government. |
Government is accountable to the public and legislature for fiscal decisions. |
| Inflation Targeting |
Direct tool for inflation targeting (e.g., CPI inflation band). |
Supports inflation control through demand-side management but not the main tool. |
| Counter-Cyclicality |
Can be used counter-cyclically to smooth business cycles. |
Also counter-cyclical — increased spending during downturns and reduced during booms. |
| Examples |
RBI lowering repo rate during economic slowdown to boost liquidity. |
Government increasing infrastructure spending and reducing taxes during recession. |
| Global Coordination |
Often coordinated among central banks in major economies. |
May involve cross-border fiscal policies, but less common. |
Monetary Policy vs Fiscal Policy