Join HVA to learn about the relationship between fiscal policy and monetary policy, as well as their impacts on promoting economic growth in Vietnam.
What is fiscal policy?
Fiscal policy is the set of measures that governments use to adjust aggregate demand in the economy through changes in public spending and taxation.
- Government spending: The government can increase government spending to stimulate the economy, create jobs and increase demand. Conversely, reducing government spending can reduce inflation and stabilize the economy.
- Taxes: The government can reduce taxes to increase disposable income of people and businesses, thereby stimulating consumption and investment. Conversely, increasing taxes can reduce demand and curb inflation.
What is monetary policy?
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Monetary policy means the set of measures that the central bank uses to adjust the amount of money supplied to the economy, through changing interest rates and other tools.
- Interest rates: When interest rates are reduced, the cost of borrowing decreases, encouraging investment and consumption, thereby stimulating the economy. Conversely, increasing interest rates will reduce the demand for borrowing, helping to curb inflation.
- Other tools: The central bank can use other tools such as open market operations and reserve requirements to adjust the money supply.
The connection between fiscal and monetary policy
Monetary and fiscal policy are the two main tools that governments use to regulate the economy. Although they have different goals, these two policies are closely related, influence each other, and can complement or oppose each other.
Supplement
- Economic Stimulus: When the economy is in recession, both fiscal and monetary policies can be used in tandem to stimulate growth. The government can increase public spending and reduce taxes to increase demand, while the central bank can reduce interest rates to encourage investment and consumption.
- Curbing Inflation: Conversely, when inflation is too high, both policies can be used to reduce price pressures. The government can reduce public spending and increase taxes to reduce demand, while the central bank can increase interest rates to reduce the money supply.
Antagonism
- Conflicting goals: If the goals of these two policies are different, they can create a conflict. For example, when the government wants to increase public spending to create employment, but the central bank wants to increase interest rates to control inflation.
- Implementation conflicts: Ineffective coordination among policy-implementing agencies can also lead to antagonism between fiscal and monetary policies.
Factors affecting fiscal and monetary policy
Economic situation
- Economic Life Cycle: Each stage of the economic cycle (boom, peak, recession, recovery) will require different combinations of main monetary policy and fiscal policy. For example:
- Growth: Need to balance between maintaining growth and controlling inflation.
- Top: Focus on curbing inflation and preventing asset bubbles.
- Recession: Prioritize stimulating growth and creating jobs.
- Recovery: Balancing growth support and ensuring price stability.
- Economic shocks: Unexpected shocks such as financial crises and pandemics can significantly change the relationship between monetary and fiscal policy, requiring governments to respond quickly and flexibly.
Economic structure
- Sectoral structure: Economies based on agriculture, industry or services will respond differently to economic policies.
- Degree of diversification: A diversified economy will be more resilient to shocks, while a mono-sector economy will be more vulnerable.
- Degree of openness of the economy: An open economy will be more affected by external factors such as fluctuations in exchange rates and global commodity prices.
Degree of openness of the economy
- Exchange rates: Exchange rate fluctuations can affect the competitiveness of domestic goods and alter investment flows.
- Current Account: The balance of payments will affect the money supply and interest rates.
- Global Commodity Prices: Fluctuations in global commodity prices, especially key export commodities, will affect inflation and national income.
Government enforcement capacity
- Central Bank Independence: The degree of independence of the central bank will affect its ability to coordinate with the government.
- Legal framework: A clear and stable legal framework will facilitate the implementation of policies.
- Effectiveness of the administrative apparatus: An effective administrative apparatus will help policies to be implemented quickly and promptly.
Vietnam's fiscal and monetary policy
Vietnam has used both monetary policy and fiscal policy to adjust the economy, especially in difficult times such as the global economic crisis. And the specific measures that Vietnam has applied:
Fiscal policy:
- Increase public spending: Invest in infrastructure, public projects, support health care, education.
- Tax reduction: Reduce corporate income tax and value added tax to encourage production and business.
- Business support: Provide preferential credit packages, interest rate support, fee reduction, and facilitate market access.
- Social Security Programs: Expand social security programs to support people affected by the recession.
Monetary policy:
- Reduce interest rates: Reduce lending rates to encourage investment and consumption.
- Increase credit limit: Increase credit limit for priority areas such as manufacturing and export.
- Bond buyback: Buying back government bonds to increase liquidity in the market and reduce interest rates.
- Exchange rate adjustment: Adjust the exchange rate to support exports and attract investment.
The effectiveness when Vietnam implements both of these policies is:
- Macroeconomic stability: Policies have helped Vietnam control inflation, stabilize exchange rates and maintain reasonable GDP growth.
- Business support: Credit support packages and tax reductions have helped businesses overcome difficulties, maintain production and business activities and create jobs.
- Improving the competitiveness of the economy: Investment policies in infrastructure and technological innovation have contributed to improving the competitiveness of the Vietnamese economy.
- Reducing Inequality: Social security programs have helped reduce inequality and protect disadvantaged groups in society.
Coordination of fiscal and monetary policies
Coordination of fiscal and monetary policies is the process of adjusting and optimizing monetary policies to achieve the economic goals of the country. Some ways combining fiscal and monetary policy include:
- Similar objectives: Fiscal and monetary policies can be set with the common goal of achieving stable economic growth, controlling inflation, and promoting employment creation.
- Information Sharing: Fiscal and monetary policies should share information with each other to better understand the impact of policy measures on the economy and ensure that measures are not contradictory.
- Policy synchronization: Fiscal and monetary policies need to be coordinated to avoid conflicts or adverse effects on each other. For example, if fiscal policy increases public spending and monetary policy simultaneously tightens monetary policy, it may lead to disruptive effects on financial markets.
- Synchronous support in promoting growth: Fiscal policy can be used to increase public spending, while monetary policy can be used to control inflation and maintain financial stability.
- Contingency policy integration: In some cases, fiscal and monetary policy integration may include the use of contingency measures such as tax cuts or interest rate increases to stabilize the economy in an uncertain environment.
Conclude
Fiscal policy and monetary policy are two effective tools to regulate the economy. In Vietnam, the close coordination between these two policies has contributed to stabilizing the macro economy and promoting growth. However, in the context of increasingly expanding international economic integration, leading to the rapid development of technology, policy management has become increasingly complicated.
Investment platform HVA provide investors with the tools and information they need to seize opportunities and mitigate risks in this volatile investment environment. A clear understanding of the relationship between fiscal and monetary policy will help investors make more informed and effective investment decisions during the investment process.
