The role of monetary and fiscal policy in the policy mix

Monetary policy is the manipulation of interest rates to influence economic activity, whilst fiscal policy is the use of the government budget (variations in the level and composition of taxation and spending) to influence the economy. Both these instruments have a role to play in the Federal Government’s policy mix to achieve key economic objectives. Historically, these objectives have been ‘internal balance’ (achieving price stability and low unemployment), ‘external balance’ (keeping the CAD, foreign liabilities and exchange rates at a sustainable level), and economic growth to improve the material standard of living in the medium to long term. Along with microeconomic reform, fiscal and monetary policy are the three instruments used to meet these objectives.
The traditional policy mix (used since the Hawke/Keating Labor government) has been to use monetary policy to address internal balance, fiscal policy to achieve external balance, and microeconomic reform to ass...