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 affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

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, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

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. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

in the U.S.) or of a supranational region (such as the

Euro zone The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...

). Fiscal policy is conducted by the executive and legislative branches of the government and deals with managing a nation’s

budget A budget is a calculation plan, usually but not always financial plan, financial, for a defined accounting period, period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including tim ...

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 collateral (finance), uncollateralized basis ...

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 Bank reserves, commercial bank's reserve, is generally determined ...

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 average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

) 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 In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...

are highly interrelated.

Fiscal policy

Fiscal policy consists in managing the national

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 mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

to finance government expenditures and the raising of

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

( 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 budg ...

) 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 total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performance o ...

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 (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

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 1903 – 9 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 ana ...

, 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