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Economic Policy: Taxation, Interest Rates, and Monetary Policy

Literature Review

My concern in policy relates to economic policies and how different tools might help to stabilize the economy and promote growth and expansion. The effect of economic policy on economic development and stabilization is examined in this literature overview. It will concentrate on how to use interest rates, taxes, and monetary policy to accomplish these objectives in particular. The literature will be evaluated in terms of common themes, presumptions, restrictions, and research implications for the future.

A study by Bindseil et al. (2015) is one of the most prominent papers on using economic policy to stabilize the economy and promote growth, i.e., Critique of Accommodating Central Bank Policy and the “Expropriation of the Saver .”The authors analyze how central banks’ initiatives to reduce interest rates and expand the money supply affect depositors. They make the case that these initiatives ultimately result in the “expropriation” of savers’ capital. The authors argue that these policies may result in a decline in investment and economic activity as they analyze the effects of related policies on economic growth. Egilsson’s (2020a) study is another critical study on economic policy for stabilization and growth. It examines how increasing interest rates might lead to inflation and currency depreciation. The author makes the case that such measures may harm economic growth by examining how boosting interest rates affects inflation and currency depreciation. The author also touches on the necessity for policymakers to strike a balance between various measures meant to boost economic activity and the effects of higher interest rates on inflation and currency depreciation.

The topic of my thesis, the studies by Bindseil et al. (2015) and Egilsson (2020a), all have a similar subject. The requirement for policymakers to thoughtfully analyze the implications of their policies on economic growth is relevant to my issue. According to the studies, stabilization and growth-oriented policies need to be carefully weighed against the potential costs of inflation, currency devaluation, and the expropriation of savers’ capital. Both pieces contend that decision-makers should consider how their actions affect the near- and long-term economic future. Both studies have the drawback of omitting to discuss the impacts of taxation and other fiscal policy measures on economic growth. While both books primarily concentrate on the effects of monetary policy on economic growth, taxes and other fiscal policy measures can substantially impact economic growth. Policymakers should be aware of the potential impacts of their decisions on economic growth. They should consider both the potential advantages and costs of their policies according to the implications of this analysis for future research. Future studies should also explore how different policies might be integrated to maximize economic growth and the implications of taxation and other fiscal policy measures on economic growth.

The influence of monetary easing measures during the COVID-19 epidemic is the main topic of Li et al.’s (2021) study. The authors thoroughly analyze how different monetary easing measures affect economic expansion. Although they warn that further research is required to determine the long-term consequences of such initiatives, the authors found that fiscal and monetary policy interventions have effectively reduced the pandemic’s economic repercussions. Research by Macek (2015) investigated how taxes affect economic growth in OECD nations. The author provides a thorough examination of both the direct and indirect effects of taxation on economic growth. The author discovered that taxes, particularly when they are used to pay for government spending, can have a detrimental impact on economic growth. The author points out that taxes can be advantageous if they fund worthwhile investments in infrastructure and human resources.

Common themes among the research by Li et al. (2021) and Macek (2015), on which my topic is based, and those studies and my topic are the necessity for policy interventions to stabilize the economy and promote growth, as well as the possible impact of taxation on economic growth. In order to maximize their effectiveness, policy interventions should be specifically adapted to the economic circumstances, according to both sources. Lack of consideration for other economic policy instruments, such as fiscal and trade policy, and a lack of discussion of the possibility that policy interventions will have unintended repercussions are two common shortcomings of the sources. Also, data must be collected to back up the writers’ conclusions. This review has recommendations for future research, including the need to examine further the efficacy of various economic policy tools in various circumstances and the possibility of unexpected consequences of policy interventions. Additional study is required to determine the long-term consequences of economic policy actions. In order to enhance the efficiency of various economic policy tools, it is necessary to look at the possibility of combining them.

The researcher also analyzes Wang et al. (2023) and Stoilova’s (2017) studies. In order to promote economic growth, the sources look at how fiscal and monetary policies have been implemented in China and the European Union, respectively. The impact of taxes on economic growth in the European Union is studied by Stoilova (2017). According to the report, taxes significantly impede economic expansion. The report also emphasizes that taxes are vital for governments to influence economic growth. However, they should be utilized with caution as they can have a detrimental impact on the economy. The effect of fiscal and monetary policy in China in promoting economic growth is examined by Wang et al. (2023). The study concludes that monetary and fiscal policies can help promote economic growth, but they should be applied carefully and in tandem. The authors conclude that a well-designed policy mix is required to attain the intended economic outcomes.

The role of taxation, fiscal policy, and monetary policy in economic growth and the necessity of a well-designed policy mix to achieve the intended economic outcomes are common themes in these two sources and my thesis. Both sources emphasize the need for cautious policy implementation and the potential hazards of doing so to achieve economic growth. The sources’ need for a thorough understanding of all the economic policy options at the disposal of governments is one of its limitations. The studies do not cover other policy instruments like government spending, public investments, and incentives; they concentrate exclusively on taxation, fiscal, and monetary policy. The sources do not mention how economic policy might affect other economic outcomes like social welfare or income inequality. In order to foster economic growth and stability, additional research is required on the function of other economic policy instruments, such as government spending, public investments, and incentives. This literature review has important implications for future research in this area. The possible effects of economic policy on other economic outcomes, such as income inequality or social welfare, should also be the subject of investigation. In light of the studies, additional study is required to determine ways to reduce risks associated with utilizing economic policy tools like taxes, fiscal policy, and monetary policy to achieve the intended economic objectives.

Bernardi (2014) talks about the difficulties with taxation that EU nations face and the European Semester. The article gives a general summary of the significant tax policy difficulties the EU is now experiencing and some potential solutions, including using the European Semester. The essay then analyzes how the European Semester would affect the EU’s economic and social progress. The use of credit and asset-based welfare to lessen Germany’s reliance on savings regimes is the subject of another paper by Mertens (2017). The article examines the different asset-based welfare programs and credit options available in Germany, including the German Social Security Act, and explores the effects of these laws. The essay also looks at these policies’ potential advantages and disadvantages.

It is clear from both sources that economic policy can be utilized to maintain economic stability and promote economic growth, which is a central issue of my study. While Mertens (2017) contends that using credit and asset-based welfare can lessen Germany’s reliance on savings regimes, Bernardi (2014) contends that the European Semester could address the problems with tax policy in the EU. Both sources stress the significance of economic policy in preserving economic stability and promoting economic growth. The two sources likewise have similar flaws. Both primarily analyze the European setting and briefly touch on economic policies in other nations. However, both sources briefly touch on the potential drawbacks and advantages of using economic policy to balance the budget and promote growth.

The review’s implications for upcoming research are apparent. First, a more significant study is required on applying economic policy in various circumstances and nations. This might offer a complete view of how economic policy can be applied to maintain economic stability and promote growth. Second, further investigation of the potential advantages and disadvantages of applying economic policy is needed. It might be more effective for policymakers to employ economic policy by being aware of these risks and advantages. The effects of the European Semester on the economic and social development of the EU should be further studied. This might help policymakers comprehend the potential consequences of the European Semester.

It is crucial for this thesis to examine further the research of Egilsson (2020b), which covers the impact of raising interest rates on inflation and currency depreciation. The author discovers that rising interest rates can result in higher inflation and currency depreciation and that a recessionary economy can exacerbate these impacts. A study by Felcser & Vonnák (2014) that examines the connections between carry trading, uncovered interest parity, and monetary policy is another suggestion made by the researcher. Carry trade, which entails borrowing money at a low-interest rate and investing it at a higher one, is found by the authors to be a valuable strategy for achieving economic stability and expansion. Additionally, the authors contend that changes in interest rates and quantitative easing can be utilized to affect the exchange rate and boost the economy.

Economic policy, such as adjustments to interest rates, taxation, and monetary policy, can stabilize the economy and promote growth (Egilsson, 2020b; Felcser & Vonnák, 2014). However, the success of these policies will differ depending on the status of the economy and the particular policy being implemented; it is crucial to keep this in mind. The literature also emphasizes the significance of comprehending the connection between uncovered interest parity, carry trade, and monetary policy to effectively employ economic policy to promote economic stability and growth.

The use of economic policy to create economic stability and growth, as well as the connections between carry trade, uncovered interest parity, and monetary policy, are common topics to my topic in the research. There needs to be more research on the long-term effects of economic policy, and the possibility of unexpected repercussions are frequent flaws or restrictions in the literature. Future research should consider the potential for unexpected repercussions and the long-term implications of economic policy on the economy. The relationship between economic policy and the exchange rate and how this relationship might be exploited to produce economic stability and growth still requires further study.

Another relevant publication to my topic is Mushtaq & Siddiqui’s (2016) article on the impact of interest rates on economic performance in Islamic and non-Islamic economies. According to Mushtaq & Siddiqui (2016), interest rates have a considerable effect on economic performance in Islamic and non-Islamic nations. They show that nations with higher interest rates typically enjoy more excellent growth rates using data from the World Bank. Additionally, they contend that economies tend to be more unstable in nations with higher levels of interest rate volatility. The authors use panel data regressions to test their theory for a sample of Islamic and non-Islamic nations. They discover higher interest rates are associated with more incredible economic growth, particularly in Islamic nations. They point out that there are regional differences in the relationship between interest rates and economic success and that further study is required to understand the mechanisms at work fully.

The use of taxation to foster economic stability and growth is thoroughly covered in the OECD study 2020 Tax Policy Reforms by Hassan et al. (2020). The research emphasizes the advantages of carefully crafted tax structures, such as higher investment, enhanced public services, and increased economic resilience. It also recognizes universal problems nations confront, like a lack of resources and weak governance. According to the research, nations should create effective, efficient, and fair tax systems. In order to accomplish these aims, it also underlines the significance of high-quality public spending and cross-border tax collaboration.

The sources from Hassan et al. (2020) and the OECD’s 2020 Tax Policy Reforms study offer insightful information on employing economic policy to enhance growth and stabilize the economy. While the OECD paper addresses the usage of taxation, Mushtaq and Siddiqui’s article concentrates on the influence of interest rates. Both sources note the potential advantages and difficulties of using these policies and the need for more study to clarify the connection between economic policy and economic success. According to the literature, developing effective, efficient, and fair tax systems, as well as international tax cooperation, should be prioritized by nations to support economic growth and stability.

A report by Gurdal et al. (2021) focused on the relationship in the G7 countries between tax income, government spending, and economic growth, and another study by Lee & Werner (2018) focusing on the U.S., the U.K., Germany, and Japan economic growth and the effect of decreasing interest rates. The study also considers how taxation and monetary policies affect economic expansion and stability. According to Gurdal et al. (2021), tax income significantly and favorably influences economic growth in the G7 nations. In addition, they discovered that government expenditure affects economic growth positively and significantly, albeit less so than taxation. Also, they discovered that the beneficial benefits of tax income and government spending were more pronounced in the near run than in the long term.

Lee & Werner (2018) investigated the connection between declining interest rates and economic expansion. They discovered better growth in those nations was linked to lower interest rates. Also, they discovered that the short-term impact of lower interest rates on growth was more significant than the long-term impact. According to the studies by Lee & Werner (2018) and Gurdal et al. (2021), taxes and monetary policy affect economic growth and stabilization. Taxes are a tool that can be used to control the flow of money through the economy, which can help the economy expand. Employing monetary policy to manage the money supply and interest rates can contribute to economic stability and growth.

According to the research, government spending, tax income, and lower interest rates can contribute to economic growth and stability. More growth may result from changing the money supply and interest rates through taxation and monetary policy. Nevertheless, the results of these measures differ from nation to nation based on unique economic circumstances. Also, these policies might have distinct short-term outcomes compared to long-term effects. It is also vital to remember that other aspects, like technical development and international trade, might impact economic growth. As a result, it is crucial to consider each of these aspects when assessing the success of the economic policy.

The Bank for International Settlements, the International Monetary Fund, and the Federal Reserve were discovered to be the more preferred sources. Due consideration should be paid to these sources in upcoming studies because of their considerable influence. The literature frequently concludes that more study is necessary to comprehend the long-term consequences of economic policy and the connection between economic policy and the exchange rate. Neglecting unintended repercussions and disregarding how economic policy affects various regions or nations are two frequent mistakes or omissions in the literature.

Work Cited

Bernardi, L. (2014, June 25). Tax reforms in EU Member States subce rhe turn of the New centuri: Selected observations [MPRA Paper].

Bindseil, U., Domnick, C., & Zeuner, J. (2015). Critique of Accommodating Central Bank Policies and the ‘Expropriation of the Saver’ (SSRN Scholarly Paper No. 2665593).

Egilsson, J. H. (2020a). How raising interest rates can cause inflation and currency depreciation. Journal of Applied Economics23(1), 450–468.

Egilsson, J. H. (2020b). How raising interest rates can cause inflation and currency depreciation. Journal of Applied Economics23(1), 450–468.

Felcser, D., & Vonnák, B. (2014). Carry trade, uncovered interest parity and monetary policy (Working Paper No. 2014/3). MNB Working Papers.

Gurdal, T., Aydin, M., & Inal, V. (2021). The relationship between tax revenue, government expenditure, and economic growth in G7 countries: New evidence from time and frequency domain approaches. Economic Change and Restructuring54(2), 305–337.

Hassan, M., Oueslati, W., & Rousselière, D. (2020). Environmental taxes, reforms and economic growth: An empirical analysis of panel data. Economic Systems44(3), 100806.

Lee, K.-S., & Werner, R. A. (2018). Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan. Ecological Economics146, 26–34.

Li, Y., Sun, Y., & Chen, M. (2021). An Evaluation of the Impact of Monetary Easing Policies in Times of a Pandemic. Frontiers in Public Health8.

Macek, R. (2015). The Impact of Taxation on Economic Growth: Case Study of OECD Countries. Review of Economic Perspectives14(4), 309–328.

Mertens, D. (2017). Borrowing for social security? Credit, asset-based welfare and the decline of the German savings regime. Journal of European Social Policy27(5), 474–490.

Mushtaq, S., & Siddiqui, D. A. (2016). Effect of interest rate on economic performance: Evidence from Islamic and non-Islamic economies. Financial Innovation2(1), 9.

Stoilova, D. (2017). Tax structure and economic growth: Evidence from the European Union. Contaduría y Administración62(3), 1041–1057.

Wang, Y., Wang, X., Zhang, Z., Cui, Z., & Zhang, Y. (2023). Role of fiscal and monetary policies for economic recovery in China. Economic Analysis and Policy77, 51–63.


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