Professor Scott Fullwiler, discussing an insight by Hyman Minsky on the difference between fiscal and monetary policy. Monetary policy (lowering interest rates to stimulate the economy and raising it to dampen the economy) attempts to stimulate the economy by getting the private sector to spend more of its income. Lowering interest rates encourages borrowing from banks or capital markets in order to invest and consume, even though your income hasn't changed.

But fiscal policy is about trying to get private sector entities to spend more by increasing their income. The income of the private sector as a whole comes from either the government or the foreign sector. Increasing government spending (or decreasing taxes) will increase private sector incomes, which might lead to more spending, and therefore more output and employment.

Or in other words, monetary policy achieves growth by driving the private sector deeper into debt. Fiscal policy achieves growth by increasing private incomes (and therefore reducing private debt).

Watch the whole video here:    • Central Bank and Monetary Policy Outl...  

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