Finance o
Policymake s
Mazen Chehimi
Richa d Beainy
A ilia ion:
CIRAME Resea ch Cen e , Business School,
Holy Spi i Uni e si y o Kaslik, P.O. Box 446,
Jounieh, Lebanon
Mone a y policy, as he name implies is ela ed wi h
money supply.
A Mone a y Policy’s pu pose is o in luence he economy
and is conduc ed by he Cen al (Fede al) bank.
Fiscal policy, as he name
implies is ela ed wi h ax
Like he mone a y policy, a Fiscal
Policy’s pu pose is o in luence
he economy as a whole and is
conduc ed by he Go e nmen .
The Quan i y Theo y o Money
The quan i y heo y o malizes he ela ionship
be ween money supply and he p ice le el:
𝑀𝑉=𝑃𝑌
Whe e:
𝑀= Money supply
𝑉= Veloci y o ci cula ion
𝑃= P ice le el
𝑌= Real ou pu
In la ion is no qui e
popula , bu expec ed
in la ion is much be e
han unexpec ed
in la ion
The Fische E ec
One o he mos impo an ela ionships in mac o- inance is he Fische E ec ,
which links nominal in e es a es o eal in e es a es and expec ed in la ion.
The Fische Equa ion:
𝑖=𝑟+𝜋𝑒
Whe e:
𝑖= nominal in e es a e
𝑟= eal in e es a e
𝜋𝑒= expec ed in la ion
The Roles o he Cen al Bank
The cen al bank is he monopoly
supplie o cu ency.
I ac s as a banke o he go e nmen
(and o o he banks) and lende o las
eso , i supe ises o he banks and
manage he ese es o he coun y
(Bo h o eign exchange and gold
ese es).
Finally, o cou se Cen al banks a e
usually esponsible o conduc ing he
mone a y policy
When he cen al bank belie es ha
he cu en g ow h a e o economic
ac i i y will lead o in la ion, i will look
o educe money supply and inc ease
in e es a es. Such ac ions a e known
as con ac iona y measu es, as hey
a e mean o ein in an o e hea ing
economy.
When he cen al bank belie es ha
he cu en le el o economic g ow h is
oo slow and in la ion is weakening, i
will look o inc ease money supply and
educe in e es a es. Such ac ions a e
known as expansiona y measu es, as
hey a e mean o s imula e a eceding
economy.
1- The Liquidi y T ap
When in e es a es app oach ze o:
People p e e liquidi y (Cash) o e bonds and
Banks hesi a e o lend (why bo he i hey
would no ealize p o i s)
So Mone a y policy loses e ec i eness
F om he 1990s o ea ly 2000s JAPAN was a
eal example o a liquidi y ap.
The Limi s o Mone a y policies
Despi e he heo e ical powe o he banking sys em o
c ea e money, se e al p ac ical limi s exis
2- Risk A e sion in Banks
Du ing pe iods o unce ain y:
Banks inc eases ese es, c edi expansion
slows and he mul iplie collapses
This occu ed globally du ing he 2008
inancial c isis and again du ing he ea ly
mon hs o he COVID-19 pandemic.
The Fiscal policy
Money P in ing o Pay Deb
Risks o High Deb
Resul : In la ion!
Taxes in a coun y can be ei he Di ec o
Indi ec
The Fiscal Mul iplie
The iscal mul iplie measu es how go e nmen spending a ec s na ional income.
Mul iplie =1
1 − 𝑀𝑃𝐶(1 − 𝑡)
Whe e:
MPC = ma ginal p opensi y o consume
= ax a e
Example:
Go e nmen inc eases spending by 10 B$.
MPC = 0.9, = 0.2.
Resul :
Mul iplie =1
1 − 0.9(1 − 0.2) = 3.57
To al inc ease in income:
10 × 3.57 =35.7𝐵$
Challenges in Execu ing Fiscal Policy
The Fiscal policy is a powe ul ool bu is cons ained by p ac ical issues:
1- Time Lags Recogni ion lag, Ac ion (decision) lag and Impac lag
2- Poli ical Cons ain s Go e nmen s may p io i ize poli ical cycles o e economic logic.
3- Financing Cons ain s High deb limi s iscal space.
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