Monetary and fiscal policy and their applications to third world countries with a huge informal sector. This essay attempts to explain what monetary and fiscal policy are and their role and contribution to the economy. This includes the government's role in regulating a country's economic performance. It also explains the different characteristics and tools of monetary and fiscal policy and their performance when applied to third world countries with a huge informal sector. Monetary Policy Monetary policy is the mechanism by which a country's monetary authority (usually the central bank) takes measures to regulate the money supply and interest rates. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy is primarily concerned with the money supply, the availability of money, the cost of money and the interest rate to achieve a series of objectives aimed at growth and stability of the economy. Here are some of the monetary policy tools: Foreign exchange requirement: This is a monetary policy that involves government intervention to curb disorderly trends in the level of foreign currencies. In case the amount of local currency decreases, the central bank uses foreign currencies to purchase its own currency from foreign economies. This ensures that the economy has a large national currency and therefore enough money in circulation. Reserve Requirements: It is mandatory for all banks to deposit a certain percentage of their assets with the central bank to ensure that bank customers' deposits are safe. These percentages represent what the central bank adjusts to reduce or increase bank lending... half of the paper... speech presented at the Fourth Central Banking Conference of the ECB, Frankfurt, Germany, November 10, 2006, viewed July 24, 2011 by.Bhattacharya, R.I. & Ajay, SP 2011, Monetary Policy Transmission In AnEmerging Market Setting, viewed July 24, 2011 by, .Federal Reserve Bank of Francisco 2011, US Monetary policy: An Introduction, viewed July 24, 2011 by, .Rhagbedra , J 2007, Fiscal Policy in Developing Countries, viewed 24 July 2011 by, .Lipsky, J 2010, Fiscal Policies Challenges in Post-Crisis World, viewed 24 July 2011 by .