Macroeconomic is highly an interesting branch of economy dealing with the structure, decision-making, performances and activities of the whole aggregate of the economy. It focuses on the changes taking place in the employment sector, Gross Domestic Product and inflation. There are two policies of macroeconomics, namely - Monetary policy and fiscal policy.
Monetary policy are the direct actions of the Central Banks of governments that are intended to influence aggregate demand and change economic conditions. Monetary policy is mainly concerned with regulating availability, cost, allocation of money and credit in the economy. Fiscal policy on the other hand, are basically government programs on public spending as wells as mobilizing resources for meeting the expenditures. The analysis of stabilization policy often proceeds under the assumption that monetary policy is the only policy instrument. There are several explanations for why this assumption is made.
First, the general criticism of stabilization policy in the 1970s and thereafter fell most heavily on fiscal policy, at least in part because fiscal policy had played a major role as a stabilization instrument in the 1950s and 1960s. Second, monetary policy is more flexible and it became conventional wisdom that fiscal policy is too inflexible to be useful as a stabilization tool. Third, the analysis of stabilization conflicts among countries is much simpler when it is assumed that there is only one instrument in each country and, given other considerations just mentioned, it is was natural to choose monetary policy as that instrument.
Importance Of Policy Coordination to Avoid Macroeconomic Instability
The economy of the entire world operates on the above two macroeconomic policies. The Sustainable Development Goal 17 which is “Partnership for the goals”, aims at enhancing global macroeconomic stability through policy coordination. For a proper balancing of the world economy, it is very important to bring coordination between policies. Governments all over the world have been working on policy coordination.
Macroeconomic policies in a sustainable manner aims for achieving social and economic well-being. To meet the aims, it is essential to reach a close degree of coordination between the monetary and fiscal authorities. Both the policies have a great impact on the levels of savings, investment, output as well as employment. Bringing a coordination between the policies will enable the central bank and the government to adopt a sustainable policy.
Lack of such a coordination can have a damaging impact on the standards of living of the people which is a direct result of macroeconomic instability. It can lead to disruption of economic activities and performances, high inflation, Increased debt levels, volatility in exchange rates which can contribute to losing of jobs, hindering progression and increasing the number of people below the poverty line.
Fiscal and monetary policy can be used together in restoring an economy to full employment output. If an economy undergoes a recession, the only way to solve it would be to engaged in expansionary fiscal policy for increasing aggregate demands. Central bank can also engage itself in expansionary monetary policy.
So, if there is no coordination between the macroeconomic policies it will impact the economic growth worldwide. Policy decisions must be taken carefully keeping in mind that macroeconomic policy actions in one country can affect economic welfare in other countries. Coordinating policies limits the effects of the business cycle in achieving economic goals of price stability. Both the fiscal and monetary policy must shift to offset debt sustainability concerns.