Stabilisation policy
Encyclopedia
A stabilization policy is a package or set of measures introduced to stabilize a financial system or economy
.
The term can refer to policies in two distinct sets of circumstances: business cycle stabilization and crisis stabilization.
. In this case the term generally refers to demand management
by monetary
and fiscal policy
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
, compensating for the predicted changes in employment and output, to increase short-run and medium run welfare.
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 International Monetary Fund
(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).
Recent examples of such packages include Argentina
'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 (at the end of the 1990s) when several Asian economies encountered financial turbulence. See examples:
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, 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 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/or hedge fund
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
on currency trades across borders.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
.
The term can refer to policies in two distinct sets of circumstances: business cycle stabilization and crisis stabilization.
Business cycle stabilization
Stabilization can refer to correcting the normal behavior of the business cycleBusiness cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
. In this case the term generally refers to demand management
Demand management
Demand management is a planning methodology used to manage forecasted demand.-Demand management in economics:In economics, demand management is the art or science of controlling economic demand to avoid a recession...
by monetary
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
and fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
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
Countercyclical
Countercyclical is a term used in economics to describe how an economic quantity is related to economic fluctuations. It is the opposite of procyclical. However, it has more than one meaning.-Meaning in policy making:...
, 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, in order to prevent the economy developing recessionRecession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
or inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
.
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
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) or the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
. 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
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
'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 (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 plansTimeline of Brazilian economic stabilization plansThe following is a timeline of the Brazilian economic stabilization plans in the "new Republic" era, a period characterized by intense inflation of the local currency, exceeding 2,700% in the period of 1989 to 1990....
- Economic Stabilization Plan (Israel 1985)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.The background to the crisis is that the years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled, inflation soared and government...
- Economy of South Korea: 1990s and the Asian Financial Crisis
- Economy of Malaysia: Asian financial crisis and recovery
- United StatesUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
- Troubled Asset Relief Program
- Emergency Economic Stabilization Act of 2008Emergency Economic Stabilization Act of 2008The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
- Office of Economic StabilizationOffice of Economic StabilizationThe 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 price, wage, and salary increases.-Directors:*...
- Economic Stabilization Act of 1970Economic Stabilization Act of 1970The Economic Stabilization Act of 1970 was a United States law that authorized the President to stabilize prices, rents, wages, salaries, interest rates, dividends and similar transfers...
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, 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 polices after a crisis, the international financial system architecture needs to be reformed to avoid some of the risks (e.g., hot money
Hot money
Hot money is a term that is most commonly used in financial markets to refer to the flow of funds from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts...
flows and/or hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
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
Tobin tax
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
on currency trades across borders.
See also
- Automatic stabilizerAutomatic stabilizerIn macroeconomics, automatic stabilizers describes how modern government budget policies, particularly income taxes and welfare spending, act to dampen fluctuations in real GDP....
- Shock therapy (economics)Shock therapy (economics)In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets....
- Policy mixPolicy mixThe policy mix is the combination of the monetary policy and the fiscal policy of a country. These two channels influence growth and employment, and are generally determined by the central bank and the government respectively....
- Welfare cost of business cyclesWelfare cost of business cyclesIn macroeconomics, the welfare cost of business cycles refers to the decrease in social welfare, if any, caused by business cycle fluctuations....
- Constitutional economicsConstitutional economicsConstitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of 'the economic analysis of constitutional law' in explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the...
- Political economyPolitical economyPolitical economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...