What is the role of monetary policy?
Economists view monetary policy as the first line of defense against economic slowdowns. Compared with fiscal policy, monetary policy has the advantages of the Federal Reserve’s ability to act faster than the administration or Congress and to better judge the appropriate timing and magnitude of a stimulus. Further, unless well crafted, fiscal stimulus may impose long-run costs on the economy without providing much short-run gain. • The Federal Reserve can adjust monetary policy more quickly than the administration and Congress can adjust fiscal policy. Because most contractions in economic activity last for only a few quarters, the timeliness of the policy response is crucial. Fiscal policy in practice responds to changes in economic conditions with a considerable lag: it takes time first to enact a stimulus bill and then to implement it, and time for the spending increases or tax reductions to reach the pockets of consumers. As a result, the effect of fiscal stimulus on household and
