Monetary and fiscal policies have impact on the total economy. Those macroeconomic policies shape, and guide and control the behavior of the economy. The following factor needs to be considered in making monetary and fiscal policy:
1. Inflationary state of the economy:
If the economy suffers higher inflation then increasing money supply through monetary policy can be ineffective. So in making monetary and fiscal policy this factor should be considered
2. Marginal propensity to consume:
The willingness of people to consume is another factor in making those policies. Suppose if people’s tendency is to consume whatever the interest rate is then monetary and fiscal policy may be ineffective
3. Govt.’s estimated GDP target:
Every govt. has specific GDP target. Govt. makes policy to achieve the estimated GDP target. So this should be taken into consideration in making monetary and fiscal policy.
4. Economic condition of a country:
When the economy is in a recession, monetary policy may be ineffective in increasing spending and income. In this case, fiscal policy might be more effective in stimulating demand.
5. Present interest rate in the market:
In setting the policies another considerable factor is the present interest rate. The present interest rate determines whether expansionary or contractionary monetary and fiscal policy should be introduced. The success of the policy depends on considering this factor.
6. Govt. revenue target:
In each and every year govt. sets specific revenue target. Through the budget govt. specifies it. So in making fiscal information xsignals policy it should be considered. Suppose, in contractionary policy tax is reduced. If this happens then the policy contradicts with the aim to achieve revenue target.
7. Govt. policy toward import and export:
Sometimes govt. wants to bar against import or export, so in making fiscal policy and monetary policy this should be taken into consideration. Reducing export duty or imposing import duty to any industry can have an impact on govt. policy.
8. If the economy is in booming situation and nation is experiencing industrialization, In that situation if govt. want to reduce the pace of industrial growth monetary and fiscal policy then become a tool. So this factor can also be considered in creating new policies.
9. Govt. policy on privatization:
If govt. want to privatize and encourage private sector to grow, Govt. will take privatization policy. In this case govt. will give facilities to the private sector by lowering taxes and decreasing interest rate through monetary and fiscal policy and vice versa. So govt. perspective on privatization is another important considerable factor.
10. Balance of payment:
Balance of payment is another important factor. If the govt. wants to decrease trade deficit certainly it can encourage export and discourage imports. So, monetary policy will reflect the desire of Govt.
11. Influence of Donor institutions and countries
As a third world and developing country like Bangladesh, where we are dependent on huge loan from the international organization. The influence of those organizations sometimes can be a considerable factor in making monetary and fiscal policy. In our country IMF and EU always pressures govt. to increase the deposit rate. So in policy making this is a considerable factor for the govt.
12. Enforcement of the policy:
In making the policies, it should be determined and ensured that the policy should be in effect. Enforcement and implication is very much important here.
13. Expectations of people regarding future:
If people expect that the monetary policy and fiscal policy will create tax burden in future, then policy implication can be difficult. So it should be taken into consideration.
14.Foreign Currency reserve:
Each and every year govt. especially central bank has some specific foreign currency reserve target. In order to increase the reserve, favorable monetary policy should be introduced. So it is also important factor in consideration.