Economic stability is the absence of excessive fluctuations in the

macroeconomy Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

.'The IMF Promotes Global Economic Stability'
/ref> An economy with fairly constant

output Output may refer to: * The information produced by a computer, see Input/output * An output state of a system, see state (computer science) * Output (economics), the amount of goods and services produced ** Gross output in economics, the value of ...

growth and low and stable

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

would be considered economically stable. An economy with frequent large

recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...

s, a pronounced

business cycle Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...

, very high or variable

, or frequent

financial crises A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...

would be considered economically unstable.

Measuring stability

Real Real may refer to: Currencies * Brazilian real (R$) * Central American Republic real * Mexican real * Portuguese real * Spanish real * Spanish colonial real Music Albums * ''Real'' (L'Arc-en-Ciel album) (2000) * ''Real'' (Bright album) (2010) ...

macroeconomic output can be decomposed into a

trend A fad or trend is any form of collective behavior that develops within a culture, a generation or social group in which a group of people enthusiastically follow an impulse (psychology), impulse for a short period. Fads are objects or behavior ...

and a cyclical part, where the

variance In probability theory and statistics, variance is the expectation of the squared deviation of a random variable from its population mean or sample mean. Variance is a measure of dispersion, meaning it is a measure of how far a set of numbers ...

of the cyclical series derived from the filtering technique (e.g., the

band-pass filter A band-pass filter or bandpass filter (BPF) is a device that passes frequencies within a certain range and rejects (attenuates) frequencies outside that range. Description In electronics and signal processing, a filter is usually a two-por ...

, or the most commonly used

Hodrick–Prescott filter The Hodrick–Prescott filter (also known as Hodrick–Prescott decomposition) is a mathematical tool used in macroeconomics, especially in real business cycle theory, to remove the cyclical component of a time series from raw data. It is used to ...

) serves as the primary measure of departure from economic stability. A simple method of decomposition involves regressing real output on the variable “time”, or on a

polynomial In mathematics, a polynomial is an expression consisting of indeterminates (also called variables) and coefficients, that involves only the operations of addition, subtraction, multiplication, and positive-integer powers of variables. An exa ...

in the time variable, and labeling the predicted levels of output as the trend and the residuals as the cyclical portion. Another approach is to model real output as

difference stationary In probability theory and statistics, a unit root is a feature of some stochastic processes (such as random walks) that can cause problems in statistical inference involving time series models. A linear stochastic process has a unit root if ...

with drift, with the drift component being the trend.

Causes of instability

Macroeconomic instability can be brought on by the lack of

financial stability Financial stability is a property of a financial system that dissipates financial imbalances that arise endogenously in the financial markets or as a result of significant adverse and unforeseeable circumstances. When stable, the system absorbs ...

, as exemplified by the

Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...

which was brought on by the

financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...

Monetarist Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national ...

s consider that a highly variable

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...

leads to a highly variable output level.

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...

believed that this was a key contributor to the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

of the 1930s.

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...

believed, and subsequent

Keynesians Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...

believe, that unstable

aggregate demand In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...

leads to macroeconomic instability, while

real business cycle Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations are accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC t ...

theorists believe that fluctuations in

aggregate supply In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms ...

drive

Effects of instabilities

Economic instability can have a number of negative effects on the overall welfare of people and nations by creating an environment in which economic assets lose value and investment is hindered or stopped. This can lead to unemployment, economic recession, or in extreme cases, a societal collapse.

Stabilization policy

When a stabilization policy is implemented, it generally involves the use of either

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...

. Either of these may be advocated by

Keynesian economists Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...

. However, they are generally opposed by

monetarist Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national ...

s and

theorists. Monetarists believe that well-intentioned contercyclical monetary policy will generally be counterproductive, adding to the existing variability of real output, and real business cycle theorists believe that such policies are misguided because they do not address the underlying causes of fluctuations, which they believe lie on the

supply side Supply-side economics is a Macroeconomics, macroeconomic theory that postulates economic growth can be most effectively fostered by Tax cuts, lowering taxes, Deregulation, decreasing regulation, and allowing free trade. According to supply-sid ...

of the economy.

References

External links