Fiscal and monetary policies are used by policymakers and central banks around the world to achieve economic stability. There are distinct differences on how they work and the impact each creates, which can certainly affect your investment.
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Fiscal policy |
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Monetary policy |
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Government |
Source |
Central bank |
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Sustainable economy growth and reduce poverty
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Goal |
Keep inflation under control, maintain long-term interest rates, and boost employment |
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Drives or tampers the overall demand of goods and services using tax rates and government spending
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How it works |
Interest rates influences the cost of borrowing and spending for individuals and businesses
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Indirect influence |
Impact on exchange rates |
High interest rates tend to attract foreign investments, driving demand, and increasing exchange rates |
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1. Government initiatives may spur demands for goods and services, increasing revenue and stock prices of businesses 2. Corporate stock prices potentially take a hit when business tax rates are raised |
Impact on investments |
1. Low interest rates decrease borrowing costs, allowing business to refinance or take on new debts with low interest 2. When interest rate is low, individual investors may shift from bonds to stocks |
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1. Increased government spending only focuses on certain industries, areas, and consumer segments 2. Policies effectiveness rely on the time lags between formulation and implementation |
Potential pitfalls |
1. Low interest rate fails to boost consumption 2. People prefer savings compared to investments 3. Inflation too specifically targeted to increase prices which decrease purchasing power |
Each of these policies has its pluses as well as limitations. In some circumstances, a combination of the two policies may be needed to revive a lacklustre economy.
Discuss further with DBS Treasures who will communicate the right strategy to stay on top of various fiscal and monetary policies, so you confidently reach your goals.
