Why is monetary policy considered more effective at controlling inflation than fiscal policy in the short run?
Answer (1)
Monetary policy is considered more effective at controlling inflation in the short run because it directly affects interest rates, borrowing, and spending behavior. When the central bank (in the Philippines, the Bangko Sentral ng Pilipinas or BSP) raises interest rates, it becomes more expensive to borrow money. This discourages consumers from using credit cards or taking out loans and discourages businesses from borrowing to expand. As spending drops, demand in the economy slows down, and this helps bring prices back under control.Fiscal policy, which involves government spending and taxes, is usually slower to implement because it requires approval from lawmakers, like Congress. For example, if the government wants to increase taxes to reduce spending, it might take months to pass a new law. On the other hand, the BSP can adjust interest rates immediately during a Monetary Board meeting.In 2022, when inflation in the Philippines began rising due to high oil prices and global supply issues, the BSP responded by raising its policy rates to cool down inflation. This action helped limit demand and avoid further price increases.Another reason monetary policy is more effective is because it sends a strong signal to the public. When people hear that the central bank is raising rates, they expect inflation to be under control soon, so they change their behavior. This helps manage inflation expectations, which is very important in preventing inflation from spiraling.To summarize, while both policies are useful, monetary policy works faster and has a more direct effect on demand, making it a powerful tool for short-term inflation control.
