Faculty of Investment

Economics for
investment decision
makers
Lecturer: Assoc. Prof. Dr. Pham Van Hung

www.khoadautu.neu.edu.vn
MONETARY AND FISCAL POLICY AND
THEIR IMPACT ON INVESTMENT
• Fiscal policy
• Monetary policy
• Impact of fiscal and monetary policies on
Investment
• Fiscal and monetary policy in VietNam
What is fiscal policy ?
Fiscal policy
Fiscal policy refers to the government's decisions
about taxation and spending. Fiscal policy is used to
accelerate growth when an economy starts to slow.
In addition, fiscal policy can be used to distribute
income and wealth.
The accelerator theory of Investment suppose that
investment depend on demand. Fiscal policy can be
used to control investment activity.
Do you remember accelerator theory of investment ?
Fiscal policy affect a number of
aspects of the economy
• Overall level of aggregate demand in an economy
and hence the level of economic activity
• Distribution of income and wealth among different
segments of the population
• Allocation of resources among different sectors and
economic agents
Fiscal policy include expansionary
fiscal policy and contractionary fiscal
policy. What is expansionary fiscal
policy?
Expansionary fiscal policy
• In a recession, the government can raise spending
in an attempt to raise employment and output.

• What are tools of fiscal policy ?

What is contractionary fiscal policy?
Contractionary fiscal policy
• In boom times - when an economy has full
employment and wages and prices are rising too
fast - then goverments spending may be reduced
and taxes raised.
What are shortcomings of fiscal
policy ?
Shortcomings of fiscal policy
• Policy lag (including action lag and impact lag)
• It is difficult to measure economic indicators
accurately.
• Fiscal policy are implemented by public projects.
However, many public project were inefficiency.
Fiscal policy tools ?
Fiscal policy tools ?
• Government spending: transfer payments; current
government spending, capital expenditure…
• Government revenue: direct taxes, indirect tax

Taxex can be justified both in terms of raising revenues to

finance expenditures and in terms of income and wealth
redistribution policies.
What is monetary policy?
Monetary policy
• Monetary policy refers to central bank activities
that are directed toward influencing the quantity of
money and credit in an economy.
• Monetary policy is used to regulate economic
activity over time. It can be used to accelerate
growth when an economy start to slow or to
moderate growth and activity when an economy
starts to overheat.
Monetary policy
• Expansionary monetary policy
• Distraction monetary policy
Expansionary monetary policy ?
Expansionary monetary
policy
When the economy is slowing and inflation and
monetary trends are weakening, Central Banks
may increase liquidity by cutting their target rate.
In these circumstances, monetary policy is said to
be expansionary
Contractionary monetary policy?
Contractionary monetary policy?
• When Central Bank believes that economic activity
is likely to lead to an increase in inflation, they
might increase interest rates, thereby reducing
liquidity. In these cases, market analysts describe
such actions as contractionary. Because the policy
is designed to cause the rate of growth of the
money supply and the real economy to contract.
How monetary policy impact on
investment ?
Monetary policy impact on
investment
• Impact on investment because of changing in
cashflow
• Impact on investment because of changing in
interest rate. Interest rate go down, investment go
up.
Monetary policy tools?
• Open market operations

• the refinancing rate

• Reserve requirements
Limitations of monetary policy?
Limitations of monetary policy
• Problems in the monetary transmission mechanism
• Interest rate adjustment in a deflationary
environment and quantitative easing as a response
Case study: the limit of monetary
policy - the case of Japan ?
 Practice problems
1, If the economy's trend GDP growth rate is 3% and its
central bank has a 2 percent inflation target, which
policy rate is most consistent with an expansionary
monetary policy ?
A, 4%
B, 5%
C, 6%

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 Practice problems
2, An increase in a Central bank's policy rate might be
expected to reduce inflationary pressures by:
A, reducing consumer demand
B, reducing the foreign exchange value of the currency
C, driving up asset prices, leading to an increase in
personal sector wealth

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 Practice problems
3, Which of the following statements best describe a
fundamental limitation of monetary policy ?
monetary policy is limited because central bankers:
A, can not control the inflation rate perfectly
B, are appointed by pliticians and are therefore never
truly independent
C, can not control the amount of money that economic
agents put in banks, not the willingness of banks to
make loans

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The relationship between monetary
and fiscal policy
• Easy fiscal policy/tight monetary policy
• Tight fiscal policy/Easy monetary policy
• Easy monetary policy/easy fiscal policy
• Tight monetary policy/tight fiscal policy
Fiscal and monetary policy and
business cycle
• fiscal and monetary policy is positively cycle in
developing country (applying easy polity during
expansion period and applying tight policy during
the recession period)
fiscal and monetary policy is negatively cycle in
developed country (applying tight polity during
expansion period and applying expansion policy
during the recession period)
Discussion: Why ?
“Greedy Effect” – Tornell&Lane 1999
• When an economy recover, growing, Government
(especially local government) would like to spend
more (because of higher revenue)
• This situation is also occured in private sector,
during expansion period, firms will be happy to
borrow more for investment. Economic expansion
and then broken down.
How about VietNam ?
Practice problems
4, If fiscal policy is easy and monetary policy is tight,
then
A, interest rates would tend to fall, reinforcing the
fiscal policy stance
B, the government sector would tend to shrink as a
proportion to total GDP
c, The government sector would tend to expand as a
proportion of total GDP
Practice problems
5, Which of the following has the greatest impact on
aggregate demand according to an IMF study ? A 1%
of GDP stimulus in:
A, government spending
B, rise in transfer benefits
c, cut in labour income tax across all income levels
Fiscal policy in Viet Nam ?
Solutions for better relationship
between fiscal and monetary policy
in Viet Nam?
Factors influencing the mix of fiscal and monetary
policy ?
Lessons to be learned?