Policy mix

The policy mix is the combination of a country's monetary policy and fiscal policy. These two channels influence growth and employment, and are generally determined by the central bank and the government (e.g., the United States Congress) respectively.

Ideally, the policy mix should aim at maximizing growth and minimizing unemployment. However, the central banks and governments are sometimes theorized to have different time horizons, with the elected governments having a shorter time range. Both can have other objectives and must apply to some constraints, diverting them from these primary objectives: obeying a deficit rule, securing the financial sector, courting popularity, etc.

Monetary policy is typically carried out by the central bank which controls interest rates and the money supply to balance control of inflation and unemployment. The government determines labour market conditions, public investment and public spending, automatic stabilizers and discretionary fiscal policy.

Central bank independence is generally held to be positive, because it prevents a single authority from simultaneously issuing debt and paying it off with newly created money, which would be inflationary.