Expand or contract?: how these policies work and what their economic impact is

At the economic level, countries have different instruments that allow them to change the direction of their economy to ensure its stability. Two of these key mechanisms are: monetary policy and fiscal policy.

(Read more: How high is the liquidity risk for Latin American companies?)

Tools related to monetary policy These are those that serve to regulate the amount of money circulating in the economy. In most nations, these are managed by the central bank, the entity in charge of making decisions aimed at maintaining control of inflation and thus promoting economic growth.

On the other side are fiscal policy instrumentsthat is, those related to the Government’s income and expenses.

Now, these policies can be managed through two approaches: the contractionist and the extractivist.

A contractionary policy is a monetary measure adopted by a central bank to reduce government spending or the rate of monetary expansion. It is usually put in place to combat economic distortions caused by an overheated economy, in other words, they seek to ‘put the brakes on’.

For its part, an expansionary policy is a form of macroeconomic policy that seeks to boost economic growth. through monetary or fiscal stimulus. That is to say, its main objective is to give a boost to economic activity.

Both the contractionary and extractivist approaches reflect their application in some indicators. In the case of monetary policy, its impact is evident in the intervention rate, bank reserve requirements, money in circulation and prices; while on the fiscal side, it is reflected in State spending, investment, taxes and debt.

(Read more: Understanding commodities: what they are, what they are for, and why you should care)

(More news: Colombia is one of the 5 least attractive countries for mining investment: why?)

According to the Bank of the Republic, even with the advantages that the different tools that make up a policy may bring, the State must be very careful not to exceed the measures it wishes to take, since these can affect the economic stability of the country.

But, Why is it important to keep this information in mind?

Knowing these types of policies can serve as a support when making informed decisions in order to better understand the state of the economy and what it is facing when investing.

(More news: What is the appeal of Colombia for investors and how to take advantage of it)

BRIEFCASE