Economic stability
 | This article needs additional citations for verification. (August 2023) |
Economic stability is the absence of excessive fluctuations in the
output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pronounced business cycle, very high or variable inflation, or frequent financial crises
would be considered economically unstable.
Measuring stability
Real macroeconomic output can be decomposed into a trend and a cyclical part, where the variance of the cyclical series derived from the filtering technique (e.g., the band-pass filter, or the most commonly used Hodrick–Prescott filter
) serves as the primary measure of departure from economic stability.
A simple method of decomposition involves
difference stationary
with drift, with the drift component being the trend.
Causes of instability
Macroeconomic instability can be brought on by the lack of
financial crisis of 2007–2008
.
Monetarists consider that a highly variable money supply leads to a highly variable output level. Milton Friedman believed that this was a key contributor to the Great Depression
of the 1930s.
real business cycle theorists believe that fluctuations in aggregate supply drive business cycles
.
Effects of instabilities
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
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.
See also
References
- ^ 'The IMF Promotes Global Economic Stability'
- ESCWA. Retrieved 2022-12-28.