{{unreferenced, date=July 2013 In

macroeconomics 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 ...

, a stabilization policy is a package or set of measures introduced to stabilize a

financial system A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of complex, c ...

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

. The term can refer to policies in two distinct sets of circumstances:

business cycle Business cycles are intervals of 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 measured by examin ...

stabilization or

credit cycle The credit cycle is the expansion and contraction of access to credit over time. Some economists, including Barry Eichengreen, Hyman Minsky, and other Post-Keynesian economists, and some members of the Austrian school, regard credit cycles as the ...

stabilization. In either case, it is a form of

discretionary policy In macroeconomics, discretionary policy is an economic policy based on the ''ad hoc'' judgment of policymakers as opposed to policy set by predetermined rules. For instance, a central banker could make decisions on interest rates on a case-by-cas ...

Business cycle stabilization

“Stabilization” can refer to correcting the normal behavior of the

, thus enhancing

economic stability Economic stability is the absence of excessive fluctuations in the macroeconomy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pron ...

. In this case, the term generally refers to

demand management Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-lev ...

monetary Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are ...

and

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 variabl ...

to reduce normal fluctuations and output, sometimes referred to as "keeping the economy on an even keel." The policy changes in these circumstances are usually

countercyclical Procyclical and countercyclical variables are variables that fluctuate in a way that is positively or negatively correlated with business cycle fluctuations in gross domestic product (GDP). The scope of the concept may differ between the context ...

, compensating for the predicted changes in employment and output, to increase short-run and medium run welfare.

Crisis stabilization

The term can also refer to measures taken to resolve a specific economic crisis, for instance, an exchange-rate crisis or

stock market crash A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often foll ...

, in order to prevent the economy developing

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 ...

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 reduct ...

. The package is usually initiated either by a government or central bank, or by either or both of these institutions acting in concert with international institutions such as the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

(IMF) or the

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

. Depending on the goals to be achieved, it involves some combination of restrictive fiscal measures (to reduce government borrowing) and monetary tightening (to support the currency). Recent examples of such packages include

Argentina Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the List of South American countries by area, second-largest ...

's re-scheduling of its international obligations (where central banks and leading international banks re-scheduled Argentina's debt so as to allow it to avoid total default), and IMF interventions in

South East Asia Southeast Asia, also spelled South East Asia and South-East Asia, and also known as Southeastern Asia, South-eastern Asia or SEA, is the geographical south-eastern region of Asia, consisting of the regions that are situated south of mainland ...

(at the end of the 1990s) when several Asian economies encountered financial turbulence. See examples: * Argentine economic crisis (1999–2002): The recovery * Timeline of Brazilian economic stabilization plans *

Economic Stabilization Plan (Israel 1985) The Economic Stabilization Plan was implemented in Israel in 1985 in response to the dire domestic economic situation of the early 1980s. History The years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled, inflatio ...

* Economy of South Korea: 1990s and the Asian Financial Crisis * Economy of Malaysia: Asian financial crisis and recovery *

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

Troubled Asset Relief Program The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President ...

Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, often called the "bank bailout of 2008", was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and signed into law by President George W. Bush. It became ...

Office of Economic Stabilization The Office of Economic Stabilization was established within the United States Office for Emergency Management on October 3, 1942, pursuant to the Stabilization Act of 1942, as a means to control inflation during World War II through regulations on ...

Economic Stabilization Act of 1970 The Economic Stabilization Act of 1970 (Title II of , formerly codified a12 U.S.C. § 1904 was a United States law that authorized the President to stabilize prices, rents, wages, salaries, interest rates, dividends and similar transfers as part ...

This type of stabilization can be painful, in the short term, for the economy concerned because of lower output and higher unemployment. Unlike a business-cycle stabilization policy, these changes will often be

pro-cyclical Procyclical and countercyclical variables are variables that fluctuate in a way that is positively or negatively correlated with business cycle fluctuations in gross domestic product (GDP). The scope of the concept may differ between the context ...

, reinforcing existing trends. While this is clearly undesirable, the policies are designed to be a platform for successful long-run growth and reform. It has been argued that, rather than imposing such policies after a crisis, the international financial system architecture needs to be reformed to avoid some of the risks (e.g.,

hot money In economics, hot money is the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts. These speculative capital flows are called "hot money" b ...

flows and/or

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as s ...

activity) that some people hold to destabilize economies and financial markets, and lead to the need for stabilization policies and, e.g., IMF interventions. Proposed measures include for example a global

Tobin tax A Tobin tax was originally defined as a tax on all spot conversions of one currency into another. It was suggested by James Tobin, an economist who won the Nobel Memorial Prize in Economic Sciences. Tobin's tax was originally intended to pen ...

on currency trades across borders.

Business cycle stabilization

Crisis stabilization

See also