Blunt tool (1 Viewer)

[mungi]

what does this term mean? isnt monetary and fiscal policy considered a 'blunt tool'. Thanks in advance

 

[veloc1ty]

It affects everyone, for example a rise in interest rates will affect even those who don't need to curtail their spending.

 

[munchiecrunchie]

I think this extract from a recent speech Glenn Stevens gave answers this particularly well:

I turn now to other arguments, not that monetary policy is ineffective, but that it is not terribly precise. One common expression is that it is a blunt instrument. People rarely define what they mean by that term, but I think they have in mind two things. First, if inflation is rising because particular prices are moving a lot, monetary policy cannot focus precisely on exactly those particular prices, or those particular features of economic behaviour causing the price rises. It is a general, rather than specific, instrument in that sense. Second, I think that when people say ‘blunt’, they mean ‘unfair’ – particularly that when interest rates rise, this affects households who owe money on a home loan. (Presumably the same argument would mean that it is equally unfair to savers to put interest rates down when the economy is weak.)

usually monetary is considered the blunt instrument, not fiscal.

 

[Glenjamin]

We have discussed this in class Mungi

 

[gnrlies]

what does this term mean? isnt monetary and fiscal policy considered a 'blunt tool'. Thanks in advance

because it affects the macro economy, but not necessarily any particular component of the economy. E.g. it would be like painting the mona lisa with a paint roller.

Fiscal policy usually isn't considered blunt because it can target specific components of the economy and has some microeconomic reform measures.

This concept is particularly useful when examining the two speed economy we have in australia. Resource rich states tend to be booming whilst manufacturing / services states tend to be in a slow period. Monetary policy affects both types of states equally as bad. Fiscal policy could however direct more spending in the slower states in order to overcome the two speed economy.