Stabilization Policy

9 Key excerpts on "Stabilization Policy"

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  eBook - ePub

  Macroeconomic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2022(Publication Date)
  • Routledge

    (Publisher)

  PART V Stabilization Policy DOI: 10.4324/9780429399350-17 Recurring economic crises are one of the features of modern capitalist economic systems. Every 8 to 12 years, the U.S. economy enters a major crisis that requires government response to stabilize the situation. Sometimes these crises are driven by financial factors. Sometimes they are a result of austerity policies in a particularly fragile economic environment. Sometimes they are the result of shocks from factors external to the domestic economy, such as the oil price shocks of the 1970s or the COVID-19 pandemic shock of 2020. Failure to act would likely turn recessions into depressions, as we learned in the 1930s, so the government must take action to stabilize the economy when crises occur. In Chapter 13, we study one possible method for dealing with an economic crisis: Fiscal policy. Fiscal policy involves using government spending and taxation to affect the economy. One of the major debates in modern economics and politics is about how (and whether) governments should utilize fiscal policy. According to the New Keynesian approach, utilizing fiscal policy to stabilize the economy can improve on market outcomes. Critics from the right (laissez-faire economists), however, argue that the government should do less, and critics from the left (political economists) argue that the government should do much more. In addition, how the government should approach the issue of the national debt and budget deficits is an important and controversial topic. Laissez-faire economists often advocate a balanced budget, whereas political economists and supply-side economists argue that running deficits improves economic growth if the money is spent properly. The New Keynesian position falls in the middle: Deficits should be run during recessions, the government should run surpluses during booms, and small deficits to fuel long-term economic growth are acceptable when the economy is at capacity

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  Available until 5 Dec |Learn more

  Economic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  Part IX Stabilization Policy DOI: 10.4324/9781315636924-37 Recurring economic crises are one of the features of modern capitalist economic systems. Every 8–12 years the U.S. economy enters a major crisis that requires government response to stabilize the situation. Sometimes these crises are driven by financial factors. Sometimes they are a result of austerity policies in a particularly fragile economic environment. Sometimes they are the result of shocks from factors external to the domestic economy, such as the oil price shocks of the 1970s or the COVID-19 pandemic shock of 2020. Failure to act would likely turn recessions into depressions, as we learned in the 1930s, so the government must take action to stabilize the economy when crises occur. In Chapter 29, we study one possible method for dealing with an economic crisis: fiscal policy. Fiscal policy involves using government spending and taxation to affect the economy. One of the major debates in modern economics and politics is about how (and whether) governments should utilize fiscal policy. According to the New Keynesian approach, utilizing fiscal policy to stabilize the economy can improve on market outcomes. Critics from the right (laissez-faire economists), however, argue that the government should do less, and critics from the left (political economists) argue that the government should do much more. In addition, how the government should approach the issue of the national debt and budget deficits is an important and controversial topic. Laissez-faire economists often advocate a balanced budget, whereas political economists and supply-side economists argue that running deficits improves economic growth if the money is spent properly. The New Keynesian position falls in the middle: deficits should be run during recessions, the government should run surpluses during booms, and small deficits to fuel long-term economic growth are acceptable when the economy is at capacity

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  eBook - PDF

  Public Sector Economics

  Made Simple

  • D. I. Trotman-Dickenson(Author)
  • 2014(Publication Date)
  • Made Simple

    (Publisher)

  The fiscal, monetary and incomes and prices policies of each country have international repercussions. Summary Fiscal Policy to Stabilise an Economy 247 Hirsch, F., and Goldthorpe, ed., Political Economy of Inflation, Harvard University Press, Cambridge, USA, 1978. Hockley, G. C , Public Finance, Routledge and Kegan Paul, London, 1979. Llewellyn, D. T., et al, The Framework of UK Monetary Policy, Heinemann Educa-tional Books, London, 1982. Musgrave, R. Α., and Musgrave, P. B., Public Finance in Theory and Practice, McGraw-Hill, New York, 1980. Peacock, A. T., The Economic Analysis of Government and Related Themes, Martin Robertson, Oxford, 1979. Prest, A. R., and Barr, Ν. Α., Public Finance in Theory and Practice, Weidenfeld and Nicolson, London, 1979. Sandford, C. T., The Economics of Public Finance, Pergamon Press, Oxford, 1981. Samuelson, P. Α., Economics, McGraw-Hill, London, 1980. Tylecote, Α., The Cause of the Present Inflation, The Macmillan Press Ltd., 1981. Exercises 1 Consider why there is a need for a fiscal policy to stabilise an economy. 2 Suggest why fiscal measures may fail to stimulate economic activity. 3 Explain how income tax has a built-in stabiliser. 4 Outline a fiscal policy to achieve an expansionary effect and the problems involved. 5 Suggest how a prices and incomes policy can be used to reinforce fiscal policy to create a contractionary effect. 6 Distinguish between the two types of inflation and suggest appropriate fiscal measures to deal with each one. 7 Why does stagflation present such a serious problem for the chancellor of the exchequer? 8 Outline a policy for controlling the aggregate demand at a time of economic boom. 9 Why are capital taxes of little use in the controlling of an economy. 10 'Monetary policy and fiscal policy are not alternative but complementary policies.' Comment on this statement. 19 Full Employment Fiscal policy to maintain full employment is equivalent to a policy to prevent unemployment.

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  Handbook of International Economics

  International Monetary Economics and Finance

  • R.W. Jones, P.B. Kenen(Authors)
  • 1988(Publication Date)
  • North Holland

    (Publisher)

  See Marion (1982) and Turnovsky (1980b). The effectiveness of government spending rules is discussed below. Ch. 17: Stabilization Policies in Open Economies 899 The preceding analysis has illustrated the significant differences between the effects of anticipated and unanticipated changes in the money supply. When changes in the money supply are anticipated, we are essentially back in the classical world of Section 4 where changes in the money supply have no real effects. (Recall that the particular classical world described in this model is one where there are no real wealth effects on aggregate demand.) Unanticipated changes, however, do have real effects, although only during the contract period. But notice that such changes have no stabilization role thus far, since they are unrelated to those exogenous disturbances that Stabilization Policy is designed to control. In fact, as Sargent and Wallace (1975) have pointed out, these unantic- ipated changes in the money supply introduce unwanted noise into the system, raising the variance of output. 5.3. Policy rules Stabilization Policy is normally aimed at countering the effects of disturbances originating elsewhere in the economy or abroad. The question addressed in this section is whether known rules by which policy reacts to these disturbances can in fact counter them. In the illustrative model introduced above, which is typical of most such studies of the open economy, policy rules do have an impact. To show how, we first modify the three-equation model introduced above by adding disturbances to the aggregate demand and money demand expressions as follows: m, - it = p t +y, - it - klr, + u:.

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  Global Imbalances, Exchange Rates and Stabilization Policy

  • A. Makin(Author)
  • 2009(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  (1 i) (1 g) . (1 i) t t t n n n j j 1 n ν ⎡ ⎣ ⎢ ⎤ ⎦ ⎥ ∑ (10.22) Select Stabilization Policy Issues 177 This formula allows governments to compute the primary balance necessary to reduce public debt to a target level as a per cent of GDP, by a specified future time. A given fiscal stance becomes untenable if public debt to income exceeds a level financial markets will tolerate. Precisely what this level is in percentage terms is a matter for judgment however and may vary from country to country, given levels of economic develop- ment and the underlying strength of financial systems. Faced with rapidly rising public debt, fiscal authorities need to decide whether merely stabilizing debt to national income is sufficient to safe- guard against financial crises. If not, the primary budget balance as the main instrument fiscal policy needs to be used more aggressively to achieve a lower public debt to GDP ratio within an acceptable time frame. Gains from fiscal consolidation Students of introductory economics absorb the Keynesian doctrine that fiscal stabilization is central to macroeconomic policy management. Governments are supposed to use their discretionary spending and income tax powers to smooth business cycle fluctuations for employ- ment purposes. By altering economy-wide activity, fiscal stabilization allegedly raises employment levels during recessions and curbs exces- sive aggregate expenditure and inflationary pressures during booms. Although there are several well-known counterarguments to the Keynesian view of the macroeconomic impact of fiscal activism, it is still surprisingly popular among academic economists and remains influential in economic policy circles. As previously argued (Makin 1998), Keynesianism provides governments with an intellectual, as well as an electoral, rationale for fiscal expansion, such as during the major recessions of recent decades.

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  The Reform of Macroeconomic Policy

  From Stagflation to Low or Zero Inflation

  • J. Perkins(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2 Principles of Macroeconomic Policy in a Stagflationary World (1981)* The basic approach to the discussion of macroeconomic policy that continues to be generally applied is that which was useful in the condi- tions that prevailed in the thirty years or so from the late 1930s to the late 1960s. During those years the principal macroeconomic problem at any given time was either the removal of excess demand or the reduc- tion of unemployment. For the past decade or so, however, the problem of the world economy has generally been to reduce both inflation and unemployment. Yet we continue to try to apply models that are inherently unable to deal with that combination of problems, as they essentially lack one of the dimensions of the dual problem that we are facing. Consequently, policy makers relying on these models often become preoccupied with stopping inflation, which leads them to concentrate their measures disproportionately upon that objective, so that they thereby make unemployment worse. Alternatively, they aim their policy measures solely or primarily at reducing unemploy- ment, and so are likely to make inflation worse. In any case, the determination to ‘reduce inflation (or unemploy- ment) first’ assumes a conflict between these two objectives that does not necessarily exist. Indeed, combinations of measures exist in princi- ple that can deal with both problems at once. In contrast to the currently prevailing approaches, the right question to ask in a situation of stagflation is: ‘What combination of measures will do most to stop stagflation?’ In other words, ‘What combination of measures will minimise the upward pressure on the price level at any given level of unemployment?’ Or ‘What measures will minimise the 4 * Originally presented as a paper to Tenth Conference of Economists, La Trobe University, Melbourne (1981).

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  An Introduction to International Macroeconomics

  A Primer on Theory, Policy and Applications

  • Graham Bird(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  The object of the policy STABILISATION POLICY IN AN OPEN ECONOMY 109 exercise is to achieve a situation as represented by point A in Figure 8.3, where the economy is in macroeconomic equilibrium at a point which coincides with both full employment and payments equilibrium. But what if the economy is not in this happy state of affairs? Say it is at point A in Figure 8.4 where there is unemployment ( Y e is to the left of Y f ) and a payments deficit ( r e is below r b ). The question is, ‘how should policy be modified?’ Where the prior policy objective is to obtain payments equilibrium, restrictive monetary policy, which in any case will tend to be caused by the reduction in the money supply associated with the payments deficit, will be more efficient than restrictive fiscal policy in terms of minimising lost output; compare the respective reductions in Y involved with a leftward shift in LM to LM 1 and a leftward shift in IS to IS 1 . Where, on the other hand, the prior objective is full employment, then expansionary fiscal policy is preferable to expansionary monetary pol-icy on the grounds that it minimises the related payments deficit; compare the rightward shift in IS to IS 2 , with the rightward shift in LM to LM 2 . 8 In fact, as noted above, policy-makers will want to achieve both targets simultaneously. This desire may be fulfilled by using the appropriate blend of fiscal and monetary policy. In the circumstances described pre-viously the appropriate blend is fiscal expansion, directed at removing F BP LM A I S Y r Figure 8.3 110 POLICY unemployment, and monetary contraction, directed at correcting the bal-ance of payments deficit. Figure 8.5 illustrates this assignment of policies. Let us examine a different starting point. The economy is experien-cing inflation and a payments surplus. This is illustrated in Figure 8.6. Here the appropriate policy mix, assuming fixed exchange rates, is monetary expansion ( LM to LM 1 ) and fiscal contraction ( IS to IS 1 ).

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  eBook - ePub

  Monetary and Financial Policies in Developing Countries

  Growth and Stabilization

  • Anis Chowdhury, Akhtar Hossain(Authors)
  • 2003(Publication Date)
  • Taylor & Francis

    (Publisher)

  5 MONETARY POLICY AS A TOOL OF ECONOMIC STABILISATION

  Although monetary policy can play both a growth-promoting and a stabilisation role, its primary objective in developing countries has been to promote economic growth largely through inflationary means, interest rate ceilings and directed credit programmes. The review of both theoretical and empirical literature on money, inflation and economic growth in Chapters 2 and 3 shows that the empirical relationship between inflation and economic growth is more complex than is theoretically perceived. The literature on inflationary finance reveals that monetary expansion to finance public investment is a hazardous means of economic growth. The review also shows that although the relationship between financial liberalisation and economic growth is much more complex, large repressions of the financial sector severely retard economic growth.

  Therefore, activist monetary policy either in the form of inflationary financing or financial repression (subsidised directed credit) is more likely to hinder economic growth. The lacklustre growth performance of most Latin American countries since the 1950s in an environment of macroeconomic instability indicates that high and unstable inflation retards economic growth. On the other hand, relatively low and stable inflation has played a positive role in economic growth in newly industrialising economies of Asia during the past two decades or so.

  Although the role of macroeconomic stability in economic growth is understood, there is controversy as to whether monetary policy should be used as a tool of economic stabilisation in developing countries. The experience of many developing countries reveals that activist monetary policy may itself become a source of macroeconomic instability. However, the issue of the role of monetary policy and its relative efficacy has its origin in the monetarist-Keynesian debate. To examine the role of monetary policy in economic stabilisation in developing countries, it is therefore important to have an understanding of the broader debate on the need for stabilisation in a capitalist economy in a historical context.

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  Economic Events, Ideas, and Policies

  The 1960s and After

  • George L. Perry, James Tobin, George L. Perry, James Tobin(Authors)
  • 2010(Publication Date)
  • Brookings Institution Press

    (Publisher)

  Beyond the actual practice of policy, what is striking if hard to docu-ment is the change in attitude on the part of policymakers. Thirty years ago the debate was between optimists who thought that activist demand man-agement could fine tune the economy, and skeptics who thought that only a cruder, less ambitious form of stabilization was possible; but it was 86 PAUL KRUGMAN taken for granted that governments could and would move decisively to end drastic recessions. Today one finds governments of nations that are clearly operating far below capacity, basically hoping that private demand will pick up, rather than being determined to provide the demand the economy needs. And one even sees a reappearance of the old idea that eco-nomic slumps are somehow healthy and necessary, providing a necessary purge of previous excesses, and that it would be wrong to try to shield the economy from this cleansing process. Why have policymakers retreated from Stabilization Policy, both in theory and in practice? In general, there are three possible stories. The first story—the one that finds favor, for example, with the Wall Street Journal editorial page—is that Keynesianism was always a snare and a delusion. According to this view, the whole idea that monetary and fiscal policy could be used to fight recessions, perhaps even the idea that demand had anything to do with the business cycle, was an appealing story that turns out to be nonsense—something like Freudian psychology or Lamarckian biology. And governments, having finally figured this out, have returned to the wisdom of their grandfathers. The second story says that Keynesianism used to be valid, perhaps still is valid for some economies, but that for other economies the environment has changed in ways that make monetary and fiscal policy unusable, inef-fective, or counterproductive.

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