macroeconomics
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 ...
, a stabilization
policy
Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an or ...
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 comple ...
or
economy
An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
. The term can refer to policies in two distinct sets of circumstances:
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 ...
stabilization or credit cycle 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 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 ...
, 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: med ...
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 variab ...
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 fol ...
, in order to prevent the economy developing
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 ...
or
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 ...
.
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 funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
(IMF) or the
World Bank
The World Bank is an international financial institution that provides loans and Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...
. 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, is a country in the southern half of South America. It covers an area of , making it the List of South American countries by area, second-largest country in South America after Brazil, the fourt ...
's rescheduling of its international obligations (where central banks and leading international banks rescheduled Argentina's debt so as to allow it to avoid total default), and IMF interventions in
South East Asia
Southeast Asia is the geographical United Nations geoscheme for Asia#South-eastern Asia, southeastern region of Asia, consisting of the regions that are situated south of China, east of the Indian subcontinent, and northwest of the Mainland Au ...
United States
The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
**
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 U.S. Presi ...
**
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing fi ...
** Office of Economic Stabilization
** Economic Stabilization Act of 1970
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 policies 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
A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
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.
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 (financial aid), welfare spending, that act to damp out fluctuations in real GDP.
The size of the government ...
*
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 econom ...
Political economy
Political or comparative economy is a branch of political science and economics studying economic systems (e.g. Marketplace, markets and national economies) and their governance by political systems (e.g. law, institutions, and government). Wi ...
*
Shock therapy (economics)
In economics, shock therapy is a group of policies intended to be implemented simultaneously in order to liberalize an economy, including liberalization of all prices, privatization, trade liberalization, and stabilization via tight monetary pol ...