Macroeconomic policy instruments are macroeconomic quantities that can be directly controlled by an economic policy maker. Instruments can be divided into two subsets: a)

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

instruments and b)

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...

instruments. Monetary policy is conducted by the

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

of a country (such as the

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

in the U.S.) or of a supranational region (such as the Euro zone). Fiscal policy is conducted by the executive and legislative branches of the government and deals with managing a nation’s budget.

Monetary policy

{{Main, Central bank#Policy instruments Monetary policy instruments are used for managing short-term rates (the

federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...

and discount rates in the U.S.), and changing

reserve requirement Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the centra ...

s for commercial banks. Monetary policy can be either expansive for the economy (short-term rates low relative to the

inflation rate In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

) or restrictive for the economy (short-term rates high relative to the inflation rate). Historically, the major objective of monetary policy had been to use these policy instruments to manage or curb domestic inflation. More recently, central bankers have often focused on a second objective: managing economic growth, as both inflation and economic growth are highly interrelated.

Fiscal policy

Fiscal policy consists in managing the national budget and its financing so as to influence economic activity. This entails the expansion or contraction of government expenditures related to specific government programs such as building roads or infrastructure, military expenditures and social welfare programs. It also includes the raising of

taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...

to finance government expenditures and the raising of

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

( Treasuries in the U.S.) to bridge the gap (

budget deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...

) between revenues (tax receipts) and expenditures related to the implementation of government programs. Raising taxes and reducing the budget deficit is deemed to be a restrictive fiscal policy as it would reduce aggregate demand and slow down

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

growth. Lowering taxes and increasing the budget deficit is considered an expansive fiscal policy that would increase aggregate demand and stimulate the

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...

History

The classification of some macroeconomic variables as ''instruments'' and some others as ''targets'' or ''objectives'' is originally due to

Jan Tinbergen Jan Tinbergen (; ; 12 April 19039 June 1994) was a Dutch economist who was awarded the first Nobel Memorial Prize in Economic Sciences in 1969, which he shared with Ragnar Frisch for having developed and applied dynamic models for the analysis o ...

, who used these concepts in his books ''On the Theory of Economic Policy'' (1952) and ''Economic Policy: Principles and Design'' (1955).Klein, Lawrence (2004), 'The contribution of Jan Tinbergen to economic science', ''De Economist'' 152 (2), pp. 155-157.

References

Macroeconomic policy instruments