DEFINITION of 'Policy Mix'

The combination of fiscal and monetary policy a nation's policymakers use to manage the economy.

BREAKING DOWN 'Policy Mix'

Economic policy consists of two major parts: fiscal policy, which encompasses taxes and government spending; and monetary policy, which encompasses the money supply and interest rates. In most democratic countries, elected legislatures control fiscal policy, while independent central banks handle monetary policy.

Governments and central banks generally share a broad set of aims: low unemployment, stable prices, moderate interest rates and healthy growth. They employ different tools to accomplish these goals, however, and often stress different priorities. Government budgets affect long-term interest rates, for example, while monetary policy affects short-term ones. Governments must win popular approval, while central bankers are technocrats that do not directly answer to voters.

At times fiscal and monetary policymakers work together. For example, the government might pass fiscal stimulus, cutting taxes and increasing spending. The central bank might provide monetary stimulus by cutting short-term interest rates. This was the policy mix that, broadly speaking, characterized the U.S.'s response to the 2008 financial crisis.

At other times fiscal and monetary policy can push in different directions. The central bank might ease monetary policy while fiscal policymakers pursue austerity, as happened in Europe following the financial crisis. Or the government, eager to win popular support, might cut taxes or boost spending despite a tight labor market and inflationary pressures. Those actions could force the central bank to raise interest rates.

RELATED TERMS
  1. Fiscal Policy

    The use of government spending and tax policies to influence ...
  2. Accommodative Monetary Policy

    Accommodative monetary policy occurs when a central bank attempts ...
  3. Response Lag

    Response lag is the time it takes for corrective monetary and ...
  4. Non-standard Monetary Policy

    A non-standard monetary policy is a tool used by a central bank ...
  5. Central Bank

    The entity responsible for overseeing the monetary system for ...
  6. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
Related Articles
  1. Insights

    A Look at Fiscal and Monetary Policy

    There's a debate over which policy is better for the economy, monetary policy or fiscal policy. Find out which side of the fence you're on.
  2. Insights

    How Monetary Policy Affects Your Investments

    Monetary policy changes can have a significant impact on every asset class. investors can position their portfolios to benefit from policy changes and boost returns by being aware of the nuances ...
  3. Insights

    What is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy, also known as fiscal policy.
  4. Insights

    The Top 6 Ways Governments Fight Deflation

    Here are six monetary and fiscal policy tools that governments use to fight deflation.
  5. Insights

    Not Crazy: Unconventional Monetary Policy

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  6. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  7. Insights

    Top 4 Central Banks Dominating the World Economy

    Central banks play an integral role in market economies by maintaining the stability and credibility of national currencies used in those economies.
  8. Investing

    Get To Know The Major Central Banks

    The policies of these banks affect the currency market like nothing else. See what makes them tick.
  9. Trading

    Why Negative Interest Rates Are Not Working

    Find out why negative interest rate policies are failing because bond buyers do not want a negative yield and saturated borrowers want to pay off debts.
  10. Tech

    Can Bitcoin Kill Central Banks?

    Bitcoin is a peer-to-peer unofficial currency that operates without government or central bank oversight. Can Bitcoin kill off the need for central banks?
RELATED FAQS
  1. How does expansionary economic policy impact the stock market?

    Find out how expansionary economic policy affects the stock market; it is bullish for stocks whether it is monetary or fiscal ... Read Answer >>
  2. Who sets fiscal policy, the president or congress?

    Discover how fiscal policy is set in the United States, including how all three branches of government can affect a given ... Read Answer >>
  3. What are some examples of expansionary monetary policy?

    Learn about expansionary monetary policy and how central banks use discount rates, reserve ratios and purchases of securities ... Read Answer >>
  4. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ... Read Answer >>
  5. What is the role of deficit spending in fiscal policy?

    Read about the role deficit spending can play in a government's fiscal policy, and learn why economists are torn about the ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center