Economic stability is the absence of excessive fluctuations in the

macroeconomy Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...

. 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 valu ...

growth and low and stable

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

would be considered economically stable. An economy with frequent large

recession In economics, a recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be tr ...

s, a pronounced

business cycle Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, governmen ...

, 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 Bank run#Systemic banki ...

would be considered economically unstable.

Measures

Real macroeconomic output can be decomposed into a

trend A fad, trend, or craze 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 for a short time period. Fads are objects or behaviors th ...

and a cyclical part, where the

variance In probability theory and statistics, variance is the expected value of the squared deviation from the mean of a random variable. The standard deviation (SD) is obtained as the square root of the variance. Variance is a measure of dispersion ...

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. It is the inverse of a '' band-stop filter''. Description In electronics and s ...

, or the most commonly used Hodrick–Prescott filter) 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 a Expression (mathematics), mathematical expression consisting of indeterminate (variable), indeterminates (also called variable (mathematics), variables) and coefficients, that involves only the operations of addit ...

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 with drift, with the drift component being the trend.

Causes

Democracy Democracy (from , ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which political power is vested in the people or the population of a state. Under a minimalist definition of democracy, rulers are elected through competitiv ...

tends to improve economic stability. Macroeconomic instability can be brought on by the lack of

financial stability Financial stability is the absence of system-wide episodes in which a financial crisis occurs and is characterised as an economy with Volatility (finance), low volatility. It also involves financial systems' stress-resilience being able to cope wi ...

, as exemplified by the

Great Recession The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009.

which was brought on by the

2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...

. Monetarists consider that a highly variable

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

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 ...

believed that this was a key contributor to the

Great Depression The Great Depression was a severe global economic downturn from 1929 to 1939. The period was characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and ...

of the 1930s.

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

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 economics, 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 the ...

leads to macroeconomic instability, while real business cycle theorists believe that fluctuations in aggregate supply drive

Effects

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 affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

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 variab ...

. Either of these may be advocated by Keynesian economists. However, they are generally opposed by monetarists and real business cycle 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 of the economy.

References

External links