Difference in Lags of Monetary and Fiscal Policies

Monetary and fiscal policies differ in the speed with which each takes effect as the time lags are variable in each case. Monetary policy is extremely flexible and emergency rate changes can be made in quick time, whereas changes in taxation take longer to organize and implement.

Because capital investment requires planning for the future, it may take some time before decreases in interest rates are translated into increased investment spending. Typically it takes six months – twelve months or more before the effects of changes in monetary policy are felt.

The impact of increased government spending is felt as soon as the spending takes place and cuts in direct and indirect taxation feed through into the economy pretty quickly. However, considerable time may pass between the decision to adopt a government spending programme and its implementation.

Therefore, even on this front it is very difficult to choose between the one of two.

As stated by many experts, the need of today is not just the pumping of liquidity in to the Indian economy (i.e. use of monetary policy) but also additional injection of demand. This can occur only through direct fiscal action by government. In India, larger government expenditure has to be oriented towards agriculture, rural development, health, human resources and infrastructure to make inclusive and balanced growth.

In conclusion, the goal of the monetary policy and fiscal policy are the same, which is to promote stable and growing economic conditions in an economy, but the instruments used to carry these out and the bodies that carry these out are different. They should be in sync to work well and such that actions of one don’t affect the actions of another and they succeed in their goals of maintaining a reasonable level of inflation and steady economic growth.