Monetary policy&fiscal policy

Pages: 8 (1807 mots) Publié le: 27 février 2011

In 2007, U.S. sub-prime mortgage crisis broke out, it quickly evolved into a global financial crisis, and the world economy has been hit hard. Countries all over the world have to take kinds of monetary policies and fiscal policies to stimulate domestic investment and consumption, hoping that can eliminate the impact of financial crisis and maintain economic growth. As theemerging economic entity in recent years, China has maintained a good momentum of economic growth. To offset the impact of financial crisis on China and continue to maintain steady and rapid economic growth, the Chinese government has adopted a package of loose monetary policies and active fiscal policies, which can stimulate investment and consumption in a certain extent, ensuring continued growth ofChinese economy. But these policies also make domestic bank’s deposit rate and loan rate decline steadily, hot money flood into the market, especially in the real estate market, leading to unprecedented high price of house, inflation pressures continue to increase. It can infer that the results of loose monetary policies and active fiscal policies have both positive and negative sides. This papertakes China as an example, analyzing and evaluating the policies response to the economic crisis and results of the implementation of various fiscal and monetary policies after the financial crisis.

Overview of fiscal policy and monetary policy
ⅰActive fiscal policy
Active fiscal policy generally means to take financial deficit or government investment to improve the lack of effective demand.According to Keynes’ theory(1936), in a recession environment, the effectiveness of monetary policy is severely constrained, it should focus on the implementation of the proactive fiscal policy to respond to the negative impact of economic recession. For the sake of responding to the financial crisis, China has used a variety of fiscal tools, such as budget, taxes, and interest subsidies. Expand ofgovernment investment and optimize the investment structure is an important measure. In 2008, China established ten measures to further expand domestic demand and promote economic growth; the government claimed that the total investment would reach 4 trillion, tilting to the following key areas: people’s well-being projects, infrastructure construction, energy conservation of key projects,business technological transformation, mergers and acquisitions, disaster recovery and reconstruction. In order to make up for gaps in investment funds, China increased the volume of treasury bonds. In 2009, 1.64 trillion yuan treasury bonds were released, and the releasing plan in 2010 will reach 1.8 trillion yuan. At the same time, China also advanced tax reform; implemented structural tax cut andadjusted the distribution of national income to increase the scale of financial assistance.

ⅱLoose monetary policy
Monetary policy mainly include such as open market operations, bills discounting, adjust deposit-reserve ratio and interest rate. In response to financial crisis, China adopted a series of monetary policies. By the end of 2008, the Central Bank had lowered deposit and lending rates 5times, one-year benchmark deposit rate had accumulated down 1.89 percentage points, the cumulative one-year benchmark lending rate had declined 2.16 percentage points, the refinancing and rediscount rates had decreased in the same time. In early 2009, China proposed an increase of 17% of the M2 in the total year and increased 5 trillion yuan of new loans. At the same time the Central Bankenlarged the size of credit of the national commercial bank, hoping that can ease the difficulty of financing for SMEs and address the liquid capital shortage problems for SMEs.

The effects of the policy response to the financial crisis
China implemented a series of proactive fiscal policies and loose monetary policies have effectively offset the impact of the global financial crisis, China's...
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