Challenges of fiscal and monetary policies in combating inflation in developing countries.

Challenges for monetary policy in combating inflation in developing countries

• The financial institutions in Uganda are not well developed and at times because of government pressure, these institutions do not perform as per guidelines governing the lending and borrowing policies.
• People’s ignorance about the operation of monetary tools i.e. even if the bank interest rates are high, people still borrow from banks.
• The increase in taxation reduces people’s disposable income leading to fall in prices of goods.
• Reduction in government expenditure on some sectors has also reduced the money supply and finally leading to low demand for the goods in the economy.

Challenges of  fiscal policy in combating inflation in developing countries.

• In most developing countries automatic fiscal stabilizers – such as income taxes and transfer programs built into the fiscal system – are too small to have a significant effect on aggregate demand
• Politicians have a problem of overspending of public revenues when they are abundant in good times.
• Fiscal expansions are difficult to reverse for instance if  inflation is due  high  government spending programs during recessions; these may be very difficult to reverse is short run