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 ...
or
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 the ...
.
The term can refer to policies in two distinct sets of circumstances:
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 ...
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
Post-Keynesian economics is a school of economic thought with its o ...
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
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 ...
, 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 pronou ...
. 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-leve ...
by
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 as ...
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 variables ...
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
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especia ...
, 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 ...
or
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 ...
.
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 globa ...
(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 Interna ...
. 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 second-largest country in South America after Brazil, th ...
'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 ...
Timeline of Brazilian economic stabilization plans
The following is a timeline of the Brazilian economy, economic stabilization plans in the "new Republic" (post-military dictatorship) era, a period characterized by intense inflation of the local currency, exceeding 2,700% in the period of 1989 to ...
*
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 ...
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 territorie ...
**
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 G ...
**
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 sho ...
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 penali ...
on currency trades across borders.
See also
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Automatic stabilizer In macroeconomics, automatic stabilizers are features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to damp out fluctuations in real GDP.
The size of the government budget deficit tends to ...
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Constitutional economics
Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economi ...
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Policy mix
The policy mix is the combination of a country's monetary policy and fiscal policy. These two channels influence growth and employment, and are generally determined by the central bank and the government (e.g., the United States Congress) resp ...
*
Political economy
Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
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Shock therapy (economics)
In economics, shock therapy is a group of policies intended to be implemented simultaneously in order to liberalize the economy, including liberalization of all prices, privatization, trade liberalization, and stabilization via tight monetary poli ...