JOURNAL ON FISCAL POLICY

1. What is Fiscal Policy, Its
Objectives, Tools And Types?
Fiscal policy is an essential tool at the disposable of the government
to influence a nation’s economic growth. The fiscal policy is used in
coordination with the monetary policy, which a central bank uses to
manage the money supply in a country. The meaning, types,
objectives, and tools are discussed in detail below.
What is a Fiscal Policy?
A government uses fiscal policy to adjust its spending and tax rates
to monitor and influence the performance of the country. The fiscal
policy is based on Keynesian economics, which is a theory by
economist John Maynard Keynes. As per the theory, a government
can play a major role in influencing productivity levels in an
economy by adjusting the tax rates and public spending.
Table of Contents
1. What is a Fiscal Policy?
2. Objectives of Fiscal Policy
3. Fiscal Policy Tools
4. Types of Fiscal Policy
1. Expansionary Fiscal Policy
2. Contractionary Fiscal Policy
5. A Balanced Approach
6. Who All are Affected?
7. Fiscal Surplus and Fiscal Deficit
8. Monetary Policy – How It’s Different?
So, the fiscal policy helps in controlling inflation, addressing
unemployment along with ensuring the health of the currency in the
international market. Now that we know what is fiscal policy, let’s
understand its objectives and types.
Objectives of Fiscal Policy
 Boosting employment levels
 Maintain or stabilize the economy’s growth rate
 Maintain or stabilize the price levels

2.  Encourage economic development
 Raising the standard of living
 Maintaining equilibrium in Balance of Payments.
Fiscal Policy Tools
A government has two tools at its disposal under the fiscal policy –
taxation and public spending.
Taxation includes taxes on income, property, sales, and
investments. On the one hand, more taxes means more income for
the government, but it also results in less income in the hand of the
people.
Public spending includes subsidies, transfer payments, like salaries
to a govt. employee, welfare programs, and public works projects.
Those who get the funds have more money to spend.
Types of Fiscal Policy

3. There are two types of fiscal policy – expansionary and
contractionary fiscal policy.
Expansionary Fiscal Policy
A government uses this type of policy to stimulate economic growth
by increasing spending or lowering taxes or both. The objective of
this policy is to ensure more money in the hands of the citizens so
that they spend more. More spending, in turn, leads to more income
and more job creation as well.
There have been debates over which is more effective – tax cuts or
spending. Some say that spending in the form of public projects
ensures that the money reaches the consumers. Those in favor of
the tax argue that tax cuts allow businesses to hire more staff.
Though there is no consensus on which of the two is better, the
government uses a combination of both the tools to boost economic
growth.
Contractionary Fiscal Policy
A government rarely uses this policy as it aims to slow economic
growth. You must be thinking why any government will want to do
that, the answer is to curtail inflation. Too much inflation has the
potential to damage the economy in the long-term. So, the
government has to step in to control inflation.
Here also, the government has the same tools at its disposal –
spending and tax cuts. But, they are used differently – taxes are
raised while the spending is reduced. One can easily imagine how
unpopular such measures will be among the voters.
A Balanced Approach
A government always faces a risk that more spending and lower tax
rates could fuel inflation. This happens because more money in the
economy pushes the consumer demand up, eventually leading to a
fall in the value of money. This means that it now takes more
money to buy a product or service, whose value is not changed.

4. So, it is very important for a government to monitor its fiscal policy
constantly. And, if there are any signs of inflation going out of
control, the government must address it accordingly.
Who All are Affected?
Fiscal policy may not benefit all the citizens in the same way. The
scope of the policy depends on the goals that the policymakers aim
to achieve. For example, if the government spends more on defense
projects, it would benefit only a few. But, if the spending is on the
construction of dams, the benefit would reach to a larger group.
Similarly, changes to a particular tax slab would affect only the
people falling in that category.
Fiscal Surplus and Fiscal Deficit
Both of these terms are important concepts of the fiscal policy. If a
govt. spends more than what it earns, it leads to the deficit. The
government then needs to borrow the funds from external
sources to maintain the balance.
If the govt. spends less than what it earns, it creates a fiscal
surplus. Though the concept sounds great, it’s very rare you will
hear a country getting surplus.
Monetary Policy – How It’s Different?
The monetary policy helps in controlling the money supply. There
are many tools under the monetary policy, but the authorities
mainly rely on raising or lowering the fed funds rate. Monetary
policy works faster than the fiscal policy. To ensure that an economy
remains efficient, policymakers should coordinate both fiscal and
monetary policies.
In monetary economics, a money multiplier is one of various closely related ratios
of commercial bank money to central bank money (also called the monetary base) under
a fractional-reserve banking system.[1]
It relates to the maximum amount of commercial bank
money that can be created, given a certain amount of central bank money. In a fractional-reserve
banking system that has legal reserve requirements, the total amount of loans that commercial
banks are allowed to extend (the commercial bank money that they can legally create) is equal to
a multiple of the amount of reserves. This multiple is the reciprocal of the reserve ratio minus
one, and it is an economic multiplier.[2]
The actual ratio of money to central bank money, also
called the money multiplier, is lower because some funds are held by the non-bank public as

5. currency. Also, banks may hold excess reserves, being reserves above the reserve
requirement set by the central bank.
Although the money multiplier concept is a traditional portrayal of fractional-reserve banking, it
has been criticized as being misleading. The Bank of England,[3]
Deutsche Bundesbank,[4]
and
the Standard & Poor's rating agency[5]
have issued refutations of the concept together with factual
descriptions of banking operations. Several countries (such as Canada, the UK, Australia and
Sweden) set no legal reserve requirements.[6]
Even in those countries that do, the reserve
requirement is as a ratio to deposits held, not a ratio to loans that can be extended.[6][7]
Basel
III does stipulate a liquidity requirement to cover 30 days net cash outflow expected under a
modeled stressed scenario (note this is not a ratio to loans that can be extended); however,
liquidity coverage does not need to be held as reserves but rather as any high-quality liquid
assets.[8][9]
In equations, writing M for commercial bank money (loans), R for reserves (central bank money),
and RR for the reserve ratio, the reserve ratio requirement is that the fraction of reserves
must be at least the reserve ratio. Taking the reciprocal, which yields meaning that
commercial bank money is at most reserves times the latter being the multiplier. (In March
2020, the minimum reserve requirement for all deposit institutions in the United States was
abolished, setting RR=0, resulting in an effective infinite multiplier.[10][11]
In practice, however,
banks continue to be limited by their capital requirement.)
If banks lend out close to the maximum allowed by their reserves, then the inequality becomes
an approximate equality, and commercial bank money is central bank money times the multiplier.
If banks instead lend less than the maximum, accumulating excess reserves, then commercial
bank money will be less than central bank money times the theoretical multiplier.
In the United States since 1959, banks lent out close to the maximum allowed for the 49-year
period from 1959 until August 2008,[citation needed]
maintaining a low level of excess reserves, then
accumulated significant excess reserves over the period September 2008 through the present
(November 2009). Thus, in the first period, commercial bank money was almost exactly central
bank money times the multiplier, but this relationship ceased in September 2008.
Contents
 1Definition
 2Mechanism
o 2.1Reserves first model
 2.1.1Formula
 2.1.2General formula
 2.1.3Table
o 2.2Loans first model
 3Implications for monetary policy
 4References
 5Sources
Definition[edit]
The money multiplier is defined in various ways.[1]
Most simply, it can be defined either as
the statistic of "commercial bank money"/"central bank money", based on the actual observed
quantities of various empirical measures of money supply,[12]
such as M2 (broad money)
over M0 (base money), or it can be the theoretical "maximum commercial bank money/central

6. bank money" ratio, defined as the reciprocal of the reserve ratio, [2]
The multiplier in the first
(statistic) sense fluctuates continuously based on changes in commercial bank money and
central bank money (though it is at most the theoretical multiplier), while the multiplier in the
second (legal) sense depends only on the reserve ratio, and thus does not change unless the
law changes.
For purposes of monetary policy, what is of most interest is the predicted impact of changes in
central bank money on commercial bank money, and in various models of monetary creation, the
associated multiple (the ratio of these two changes) is called the money multiplier (associated to
that model).[13]
For example, if one assumes that people hold a constant fraction of deposits as
cash, one may add a "currency drain" variable (currency–deposit ratio),and obtain a multiplier
of
These concepts are not generally distinguished by different names; if one wishes to distinguish
them, one may gloss them by names such as empirical (or observed)
multiplier, legal (or theoretical) multiplier, or model multiplier, but these are not standard
usages.[12]
Similarly, one may distinguish the observed reserve–deposit ratio from the legal (minimum)
reserve ratio, and the observed currency–deposit ratio from an assumed model one. Note that in
this case the reserve–deposit ratio and currency–deposit ratio are outputs of observations, and
fluctuate over time. If one then uses these observed ratios as model parameters (inputs) for the
predictions of effects of monetary policy and assumes that they remain constant, computing a
constant multiplier, the resulting predictions are valid only if these ratios do not in fact change.
Sometimes this holds, and sometimes it does not; for example, increases in central bank money
may result in increases in commercial bank money – and will, if these ratios (and thus multiplier)
stay constant – or may result in increases in excess reserves but little or no change in
commercial bank money, in which case the reserve–deposit ratio will grow and the multiplier will
fall.[14]
Mechanism[edit]
Further information: Fractional-reserve banking
There are two suggested mechanisms for how money creation occurs in a fractional-reserve
banking system: either reserves are first injected by the central bank, and then lent on by the
commercial banks, or loans are first extended by commercial banks, and then backed by
reserves borrowed from the central bank. The "reserves first" model is that taught in mainstream
economics textbooks,[1][2]
while the "loans first" model is advanced by endogenous
money theorists.
Reserves first model[edit]
In the "reserves first" model of money creation, a given reserve is lent out by a bank, then
deposited at a bank (possibly different), which is then lent out again, the process repeating[2]
and
the ultimate result being a geometric series.
Formula[edit]
The money multiplier, m, is the inverse of the reserve requirement, RR:[2]
General formula[edit]
To correct for currency drain (a lessening of the impact of monetary policy due to peoples'
desire to hold some currency in the form of cash) and for banks' desire to hold reserves in
excess of the required amount, the formula:

7. can be used, where "Currency Drain Ratio" is the ratio of cash to deposits, i.e. C/D, and
the Desired Reserve Ratio is the sum of the Required Reserve Ratio and the Excess
Reserve Ratio.[13]
The desired reserve ratio is the amount of its assets that a bank chooses to hold as
excess and required reserves; it is a decreasing function of the amount by which the
market rate for loans to the non-bank public from banks exceeds the interest rate on
excess reserves and of the amount by which the federal funds rate exceeds the interest
rate on excess reserves. Since the money multiplier in turn depends negatively on the
desired reserve ratio, the money multiplier depends positively on these two opportunity
costs. Moreover, the public’s choice of the currency drain ratio depends negatively on
market rates of return on highly liquid substitutes for currency; since the currency ratio
negatively affects the money multiplier, the money multiplier is positively affected by the
return on these substitutes.
The formula above is derived from the following procedure. Let the monetary base be
normalized to unity. Define the legal reserve ratio, , the excess reserves ratio,
, the currency drain ratio with respect to deposits, ; suppose the demand for funds
is unlimited; then the theoretical superior limit for deposits is defined by the following
series:
.
Analogously, the theoretical superior limit for the money held by public is defined by the
following series:
and the theoretical superior limit for the total loans lent in the market is defined by the
following series:
By summing up the two quantities, the theoretical money multiplier is defined as
where α + β = Desired ReserveRatio and
The process described above by the geometric series can be represented in the
following table, where
 loans at stage are a function of the deposits at the preceding stage:
 publicly held money at stage is a function of the deposits at the preceding
stage:

8.  deposits at stage are the difference between additional loans and publicly held
money relative to the same stage:

9. This re-lending process (with no currency drain) can be depicted as follows, assuming a
20% reserve ratio and a $100 initial deposit:

10. Individual
bank
Amount deposited Lent out Reserves
A 100.00 80.00 20.00
B 80.00 64.00 16.00
C 64.00 51.20 12.80
D 51.20 40.96 10.24
E 40.96 32.77 8.19
F 32.77 26.21 6.55
G 26.21 20.97 5.24
H 20.97 16.78 4.19
I 16.78 13.42 3.36
J 13.42 10.74 2.68
K 10.74
Total reserves:
89.26
Total amount of
deposits:
Total amount
lent out:
Total reserves + last
amount deposited:
457.05 357.05 100.00

11. Table sources:[15][16][17][18]
Note that no matter how many times the smaller and smaller amounts of money are re-
lended, the legal reserve requirement is never exceeded - because that would be illegal.
Loans first model[edit]
In the alternative model of money creation, loans are first extended by commercial banks
– say, $1,000 of loans (following the example above), which may then require that the
bank borrow $100 of reserves either from depositors (or other private sources of
financing), or from the central bank. This view is advanced in endogenous
money theories, such as the Post-Keynesian school of monetary circuit theory, as
advanced by such economists as Basil Moore and Steve Keen.[19]
Finn E. Kydland and Edward C. Prescott argue that there is no evidence that either the
monetary base or Ml leads the cycle.[20]
Jaromir Benes and Michael Kumhof of the IMF Research Department, argue that: the
“deposit multiplier“ of the undergraduate economics textbook, where monetary
aggregates are created at the initiative of the central bank, through an initial injection of
high-powered money into the banking system that gets multiplied through bank lending,
turns the actual operation of the monetary transmission mechanism on its head. At all
times, when banks ask for reserves, the central bank obliges. According to this model,
reserves therefore impose no constraint and the deposit multiplier is therefore a myth.
The authors therefore argue that private banks are almost fully in control of the money
creation process.[21]
John Whittaker of Lancaster University Management School, describes two systems
used by the Bank of England. In both systems, the central bank supplies reserves to
meet demand.[22]
Implications for monetary policy[edit]
See also: Monetary policy
According to the quantity theory of money, the multiplier plays a key role in monetary
policy, and the distinction between the multiplier being the maximum amount of
commercial bank money created by a given unit of central bank money and
approximately equal to the amount created has important implications in monetary
policy.
If banks maintain low levels of excess reserves, as they did in the US from 1959 to
August 2008, then central banks can finely control broad (commercial bank) money
supply by controlling central bank money creation, as the multiplier gives a direct and
fixed connection between these.
If, on the other hand, banks accumulate excess reserves, as occurs in some financial
crises such as the Great Depression and the Financial crisis of 2007–2010, then this
relationship breaks down and central banks can force the broad money supply to shrink,
but not force it to grow:
By increasing the volume of their government securities and loans and by lowering
Member Bank legal reserve requirements, the Reserve Banks can encourage an
increase in the supply of money and bank deposits. They can encourage but, without
taking drastic action, they cannot compel. For in the middle of a deep depression just
when we want Reserve policy to be most effective, the Member Banks are likely to be
timid about buying new investments or making loans. If the Reserve authorities buy
government bonds in the open market and thereby swell bank reserves, the banks will

12. not put these funds to work but will simply hold reserves. Result: no 5 for 1, “no nothing,”
simply a substitution on the bank’s balance sheet of idle cash for old government bonds.
— (Samuelson 1948, pp. 353–354)
Restated, increases in central bank money may not result in commercial bank money
because the money is not required to be lent out – it may instead result in a growth of
unlent reserves (excess reserves). This situation is referred to as "pushing on a string":
withdrawal of central bank money compels commercial banks to curtail lending (one
can pull money via this mechanism), but input of central bank money does not compel
commercial banks to lend (one cannot push via this mechanism).
This described growth in excess reserves has indeed occurred in the Financial crisis of
2007–2010, US bank excess reserves growing over 500-fold, from under $2 billion in
August 2008 to over $1,000 billion in November 2009.[23][24]
References[edit]
1. ^ Jump up to:a b c (Krugman & Wells 2009, Chapter 14: Money, Banking, and the Federal
Reserve System: Reserves, Bank Deposits, and the Money Multiplier, pp. 393–396)
2. ^ Jump up to:a b c d e (Mankiw 2008, Part VI: Money and Prices in the Long Run: The
Money Multiplier, pp. 347–349)
3. ^ McLeay, Michael; Radia, Amar; Thomas, Ryland. "Money creation in the modern
economy". Bank of England. Archived from the original on 2019-11-12. Retrieved 2019-
11-14.
4. ^ "The role of banks, non- banks and the central bank in the money creation
process" (PDF). Deutsche Bundesbank. Monthly Report April
2017/13. Archived (PDF) from the original on 2019-09-17. Retrieved 2019-11-16.
5. ^ Sheard, Paul (2013-08-13). "Repeat After Me: Banks Cannot And Do Not "Lend Out"
Reserves" (PDF). Standard & Poor's. Archived (PDF) from the original on 2019-11-14.
Retrieved 2019-11-14.
6. ^ Jump up to:a b http://www.imf.org/external/pubs/ft/wp/2011/wp1136.pdf
7. ^ http://www.bis.org/publ/bcbs189.pdf
8. ^ http://www.bis.org/publ/bcbs238.pdf
9. ^ http://www.bis.org/bcbs/basel3/b3summarytable.pdf
10. ^ "Policy Tools — Reserve Requirements". Federal Reserve. February 3, 2021.
Retrieved 2021-03-16.
11. ^ The Fed Fires ‘The Big One’
12. ^ Jump up to:a b (Krugman & Wells 2009, p. 395) calls the observed multiplier the "actual
money multiplier".
13. ^ Jump up to:a b (Mankiw 2002, Chapter 18: Money Supply and Money Demand: A Model
of the Money Supply, pp. 486–487)
14. ^ (Mankiw 2002, p. 489)
15. ^ Table created with the OpenOffice.org Calc spreadsheet program using data and
information from the references listed.
16. ^ Federal Reserve Education - How does the Fed Create Money? "Archived copy".
Archived from the original on 2010-01-06. Retrieved 2009-12-21.
See the link to "The Principle of Multiple Deposit Creation" pdf document towards bottom of page.
17. ^ An explanation of how it works from the New York Regional Reserve Bank of the US
Federal Reserve system. Scroll down to the "Reserve Requirements and Money
Creation" section. Here is what it says:
"Reserve requirements affect the potential of the banking system to create transaction deposits. If
the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out
$90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank
receiving that deposit can lend out $81. As the process continues, the banking system can expand
the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000).
In contrast, with a 20% reserve requirement, the banking system would be able to expand the
initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher

13. reserve requirements should result in reduced money creation and, in turn, in reduced economic
activity."
The link to this page is: http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html
18. ^ Bank for International Settlements - The Role of Central Bank Money in Payment
Systems. See page 9, titled, "The coexistence of central and commercial bank monies:
multiple issuers, one currency": http://www.bis.org/publ/cpss55.pdf A quick quote in
reference to the 2 different types of money is listed on page 3. It is the first sentence of
the document:
"Contemporary monetary systems are based on the mutually reinforcing roles of central bank
money and commercial bank monies."
19. ^ Debtwatch No. 38: The GFC—Pothole or Mountain?, August 30, 2009
20. ^ https://www.minneapolisfed.org/research/qr/qr1421.pdf
21. ^ http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
22. ^ "John Whittaker" (PDF).
23. ^ EXCRESNS series, St. Louis Fed
24. ^ Followup on Samuelson and monetary policy, Paul Krugman, NewYork
Times, December 14, 2009
Sources[edit]
 Kydland, Finn E.; Prescott, Edward C., "Business Cycles: Real Facts and a Monetary
Myth", Federal Reserve Bank of Minneapolis Quarterly Review, 14 (2): 3–18
 Krugman, Paul; Wells, Robin (2009), Macroeconomics, ISBN 978-0-7167-7161-6; a
mainstream introductory text in macroeconomics.
 Mankiw, N. Gregory (2008), Principles of Macroeconomics (5th ed.), ISBN 978-0-324-58999-
3; a mainstream general introductory text to economics.
 Mankiw, N. Gregory (2002), Macroeconomics (5th ed.), Worth Publishers, ISBN 978-0-7167-
5237-0; a mainstream intermediate text in macroeconomics.
 Samuelson, Paul (1948), Economics
The Economy monetization is a metric of the national economy, reflecting its saturation with
liquid assets. The level of monetization is determined both by the development of the national
financial system and by the whole economy. The monetization of economy also determines the
freedom of capital movement. Long time ago scientists recognized the important role played by
the money supply. Nevertheless, only approximately 50 years ago did Milton
Friedman convincingly prove that change in the money quantity might have a very serious effect
on the GDP.[1]
The monetization is especially important in low- to middle-income countries in
which it is substantially correlated with the per-capita GDP and real interest rates. This fact
suggests that supporting an upward monetization trend can be an important policy objective for
governments.[2]
The reverse concept is called economy demonetization.
Contents
 1Monetization coefficient
o 1.1Formula
o 1.2Criticism
 2Economy demonetization
 3Monetization coefficients for countries (2015–2018, %)
 4See also
 5References
 6External links

14. Monetization coefficient[edit]
The monetization coefficient (or ratio) of the economy is an indicator that is equal to the ratio of
the money supply aggregate M2 to the gross domestic product (GDP)—both nominated in
current prices.[3]
The coeffitient reflects the proportion of the total of goods and services of an
economy that is monetized—being actually paid for in money by the purchaser—to substitute
bartering.[4]
This is one of the most important characteristics of the level and course of economic
development.[5]
The ratio can be as low as 10–20% for the emerging economies and as high as
100%+ for the developed countries.
Formula[edit]
The ratio is, in fact, based on the money demand function of Milton Friedman.[6]
This coefficient gives an idea of the degree of financial security of the economy. Many scientific
publications calculate not only the indicator of M2/GDP but also M3/GDP and M1/GDP. The
higher the M3/GDP compared to M1/GDP, the more developed and elaborated the system of
non-cash payments and the financial potential of the economy.[7]
A small difference indicates that
in this country a significant proportion of monetary transactions are carried out in cash, and the
banking system is poorly developed. It is impossible to artificially increase the monetization
coefficient; its growth is based on the high level of savings within the national financial system
and on the strengthened confidence in the national economic policy and economic growth. The
ability of the state to borrow money in the domestic market and implement social programs
depends on the value of the coefficient.
The monetization ratio is positively related to the expected wealth and negatively related to the
opportunity costs of holding money.[6]
A high level of economy monetization is typical
for developed countries with a well-functioning financial sector. A low level of monetization
creates an artificial shortage of capital and, consequently, investments. This fact limits any
economic growth. At the same time, the saturation of the economy with money in an
undeveloped financial system will only lead to an increase in inflation and, accordingly, an even
greater decrease in the economy monetization. This is so due to the fact that the additional
money supply enters the consumer market, increasing the aggregate demand, but does not
proportionally affect the level of supply.
Criticism[edit]
 There is a certain paradox associated with the difference between the nominal and real
money supply. The uncontrolled monetary emission does not lead to an increase in the
economy monetization—but to its decrease. The rapid increase of the nominal money supply
during the period of high inflation leads to an increase in prices and, accordingly, in the
nominal GDP, which outstrips the increase in the amount of money, which accordingly leads
to a decrease in the monetization coefficient. In contrast, a decrease in the growth rate of the
nominal money supply coupled with a growing GDP increases confidence in the national
currency, leading to an increase in the economy monetization.[8]
 The GDP tends to change in a linear manner whereas the money supply may change
exponentially. This fact may distort the real situation.[1]
 For developed countries the relationship between growth in the money supply and the
economic performance may become weak.[9]
 Methods to calculate both GDP and M2 may vary from country to country, sometimes
making a direct comparison between ratios troublesome.

15.  The money supply is measured on a specific date whereas the GDP is calculated for a
specific period of time (year).
Economy demonetization[edit]
Thare are two primary nonmonetized sectors in the economy: subsistence and barter.[5]
Modern
economic publications define the economy demonetization as an increase in the share of barter
in the economic life and its displacement of money as a medium of exchange. Demonetization,
as a transition from monetary to barter exchange, oftentimes occurs during the periods of military
operations and hyperinflation, that is, when money loses its natural role in the economy as a
measure of value, means of circulation, accumulation, payment. Counterintuitively, the
demonetization can also be observed in the peacetime, in the absence of the hyperinflation.[10]
The microeconomic explanation of demonetization is the hypothesis of so-called "liquidity
constraints". When entrepreneurs simply do not have enough money to carry out the necessary
transactions, they have to resort to the commodity-for-commodity form of exchange. It is noted
that in the context of financial crises the demonetization is associated with a strict state monetary
policy. The monetary tightening (higher taxes, lower government spending, a reduction in the
money supply to prevent inflation, etc.) leads to a relative stabilization of the financial sector,
which, due to a decrease in liquidity, leads to the demonetization of the economy and
exacerbates the production crisis. The monetary easing, in turn, exacerbates the financial crisis.
Alternative explanations suggest that the demonetization can be a form of tax evasion.[11]
Monetization coefficients for countries (2015–
2018, %)[edit]
The table includes data for both developed and emerging economies.[12]
Country 2015 2016 2017 2018
US 68.52 71.37 71.88 70.77
UK 48.36 63.83 69.40 64.31
Germany 85.69 87.96 88.51 89.06
Japan 173.04 177.77 181.29 184.87
Brazil 33.17 41.84 37.97 39.35
India 18.04 13.51 17.89 18.00
China 194.18 199.30 212.16 198.04

16. Russia 39.41 42.36 43.55 43.22
See also[edit]
 The Buffett indicator, a valuation multiple used to assess how expensive or cheap the
aggregate stock market is at a given point in time by compares the capitalization of the
US Wilshire 5000 index to the US GDP.[13]
 Complementary currency
 Debt monetization
 Money multiplier
 Non-monetary economy
References[edit]
1. ^ Jump up to:a b Blinov, Sergey (27 October 2015). "Real Money and Economic Growth" (PDF).
Munich Personal RePEc Archive. Retrieved 24 May 2021.
2. ^ Kinoshita, Noriaki; McLoughlin, Cameron (1 June 2012). "Monetization in Low- and Middle-
Income Countries". International Monetary Fund. Retrieved 26 May 2021.
3. ^ Khmurych, Volodymyr (May 1998). "Explaining Monetization with Reference to Transitional
Economies" (PDF). Kyiv School of Economics. p. 3. Retrieved 24 May 2021.
4. ^ Wang, Lei (2019-12-01). "A Farewell to Monetization". Man and the Economy. De
Gruyter. doi:10.1515/me-2019-0007. Retrieved 24 May 2021.
5. ^ Jump up to:a b Chandavarkar, Anand G. (1977-01-01). "Monetization of Developing
Economies". IMF Staff Papers. doi:10.5089/9781451969450.024.A005. Retrieved 24 May 2021.
6. ^ Jump up to:a b Wang, Lei; Zhu, Taihui (2018-06-25). "The myth of China's monetization". Applied
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External links
Recently, the government of India has launched the National Monetisation Pipeline (NMP).
The NMP estimates aggregate monetisation potential of Rs 6 lakh crores through core
assets of the Central Government, over a four-year period, from FY 2022 to FY 2025.
 The plan is in line with Prime Minister's strategic divestment policy, under which the
government will retain presence in only a few identified areas with the rest tapping the
private sector.

17. Key Points
 About the NMP:
o It aims to unlock value in brownfield projects by engaging the private sector,
transferring to them revenue rights and not ownership in the projects,
and using the funds generated for infrastructure creation across the country.
o The NMP has been announced to provide a clear framework for
monetisation and give potential investors a ready list of assets to generate
investment interest.
o Union Budget 2021-22 has identified monetisation of operating public
infrastructure assets as a key means for sustainable infrastructure financing.
o Currently, only assets of central government line ministries and Central Public
Sector Enterprises (CPSEs) in infrastructure sectors have been included.
o The government has stressed that these are brownfield assets, which have been
“de-risked” from execution risks, and therefore should encourage private
investment.
o Roads, railways and power sector assets will comprise over 66% of the total
estimated value of the assets to be monetised, with the remaining upcoming
sectors including telecom, mining, aviation, ports, natural gas and petroleum
product pipelines, warehouses and stadiums.
 In terms of annual phasing by value, 15% of assets with an indicative value
of Rs 0.88 lakh crore are envisaged for rollout in the current financial year.
o The NMP will run co-terminus with the Rs 100 lakh crore National
Infrastructure Pipeline (NIP) announced in December 2019.

18.  The estimated amount to be raised through monetisation is around 14% of
the proposed outlay for the Centre of Rs 43 lakh crore under NIP.
 NIP will enable a forward outlook on infrastructure projects which will
create jobs, improve ease of living, and provide equitable access to
infrastructure for all, thereby making growth more inclusive. NIP includes
economic and social infrastructure projects.
 Other Initiatives for Infrastructure Development include Scheme of
Financial Assistance to States for Capital Expenditure, Industrial
corridors, etc.
Monetisation
 In a monetisation transaction, the government is basically transferring revenue rights
to private parties for a specified transaction period in return for upfront money, a
revenue share, and commitment of investments in the assets.
 Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts
(Invits), for instance, are the key structures used to monetise assets in the roads and
power sectors.
o These are also listed on stock exchanges, providing investors liquidity through
secondary markets as well.
 While these are a structured financing vehicle, other monetisation models on PPP
(Public Private Partnership) basis include:
o Operate Maintain Transfer (OMT),
o Toll Operate Transfer (TOT), and
o Operations, Maintenance & Development (OMD).
 Greenfield vs Brownfield Investment
o Greenfield Project:
 It refers to investment in a manufacturing, office, or other physical company-
related structure or group of structures in an area where no previous facilities
exist.
o Brownfield investment:
 The projects which are modified or upgraded are called brownfield projects.
 The term is used for purchasing or leasing existing production facilities to
launch a new production activity.
 Associated Challenges:
o Lack of identifiable revenue streams in various assets.

19. o The slow pace of privatisation in government companies including Air India
and BPCL.
 Further, less-than-encouraging bids in the recently launched PPP initiative in
trains indicate that attracting private investors' interest is not that easy.
o Asset-specific Challenges:
 Low Level of capacity utilisation in gas and petroleum pipeline networks.
 Regulated tariffs in power sector assets.
 Low interest among investors in national highways below four lanes.
 Konkan Railway, for instance, has multiple stakeholders, including state
governments, which own stake in the entity.
Way Forward
 Execution is the Key: While the government has tried to address many challenges,
owing to infrastructure development in the NMP framework, execution of the plan
remains key to its success.
 Dispute Redressal Mechanism: Further, there is a need for an efficient dispute
resolution mechanism.
 Multi-Stakeholder Approach: The success of the infrastructure expansion plan would
depend on other stakeholders playing their due role.
o These include State governments and their public sector enterprises and the private
sector.
o In this context, the Fifteenth Finance Commission has recommended the setting
up of a High-Powered Intergovernmental Group to re-examine the fiscal
responsibility legislation of the Centre and States.

20. 2021