The Stabilization Policy

Stabilization policy is a package or set of measures introduced to stabilize a financial system or economy.

Stabilization can refer to correcting the normal behavior of the business cycle. In this case the term generally refers to demand management by monetary and fiscal policy to reduce normal fluctuations and output.

The policy changes in these circumstances are usually countercyclical, compensating for the predicted changes in employment and output, to increase short-run and medium run welfare.

Crisis stabilization refer to measures taken to resolve a specific economic crisis, for instance an exchange-rate crisis or stock market crash, in order to prevent the economy developing recession or inflation.

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 IMF or the World Bank. 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).

This type of stabilization can be painful, in the short term, for the economy concerned because of lower output and higher unemployment.

While this is clearly undesirable, the policies are designed to be a platform for successful long-run economic growth and reform.

Rather than imposing such polices after a crisis, the international financial system architecture needs to be reformed to avoid some of the risks (e.g. hot money flows and hedge fund activity) that some people hold to destabilize economies and financial markets, and lead to the need for stabilization policies and IMF interventions.

Date: 2015-02-28; view: 1829