What is a 'Stabilization Policy'

A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by gross domestic product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well.

BREAKING DOWN 'Stabilization Policy'

Stabilization policies are fiscally oriented and designed to reduce fluctuations in certain areas of the economy, such as inflation and unemployment, while aiming to maximize associated national income levels. Fluctuations can be controlled through various mechanisms including policies designed to increase demand to help counter high levels of unemployment or to suppress demand in response to rising inflation.

Stabilization Policy and Economic Recovery

Stabilization policies are also used to help an economy recover from a specific economic crisis or shock, such as sovereign debt defaults or a stock market crash. In these instances, stabilization policies may come from governments directly through overt legislation, securities reforms or from international banking groups, such as the World Bank.

Stabilization Policy and Keynesian Economics

Noted economist John Maynard Keynes theorized that when the individuals within an economy did not have the buying power necessary to purchase the goods or services being produce that, in order to entice consumers, prices would fall. As prices fall, businesses could experience significant losses, resulting in an increase in corporate bankruptcies. As former employees of the now defunct companies joined the ranks of the unemployed, resulting in less buying power in the consumer market, prices would need to fall again.

This process was considered cyclic in nature, and in order to stop the cycle, fiscal policy changes would be required. Keynes suggested that, through policy creation, a government could manipulate aggregate demand to correct the trend.

As economies become more complex and advanced, top economists believe that maintaining a steady price level and pace of growth is the key to long-term prosperity. When any of the aforementioned variables becomes too volatile, there are unforeseen consequences and effects to the broad economy that keep markets from functioning at their optimum level of efficiency. Most modern economies employ stabilization policies, with much of the work being done by central banking authorities like the U.S. Federal Reserve Board. Stabilization policy is largely credited with the moderate but positive rates of GDP growth seen in the United States since the early 1980s.

RELATED TERMS
  1. Policy Mix

    A government's combined use of fiscal policy and monetary policy ...
  2. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  3. Automatic Stabilizer

    Economic policies and programs that are designed to offset fluctuations ...
  4. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  5. John Maynard Keynes

    An author and economist who is well-known for his stance that ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
Related Articles
  1. Insights

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  2. Insights

    Top 4 Central Banks Dominating the World Economy

    Central banks play an integral role in market economies by maintaining the stability and credibility of national currencies used in those economies.
  3. Insights

    A Look At Fiscal And Monetary Policy

    There's a debate over which policy is better for the economy. Find out which side of the fence you're on.
  4. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  5. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  6. Trading

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  7. Insights

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  8. Insights

    How Automatic Stabilizers Work

    Many economists claim that automatic stabilizers only work in the short term and question their effect on government spending. In truth, automatic stabilizers do not always have enough impact ...
  9. Insights

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  10. Investing

    Central Bankers' Role in Keynesian Economics

    Learn about the role of monetary policy in Keynesian economics, and examine how central banks impacted aggregate demand in the aftermath of the 2008 crisis.
RELATED FAQS
  1. How do fiscal and monetary policies affect aggregate demand?

    Learn about the impact fiscal and monetary policy have on aggregate demand, and discover how the government influences economic ... Read Answer >>
  2. How successful is fiscal policy in guiding the national economy?

    See why it is difficult to evaluate the impact of fiscal policy on the national economy and how fiscal tools have failed ... Read Answer >>
  3. Under what circumstances will a government change its monetary policy?

    Learn about the kind of variables, including political and theoretical factors, that can bring about change in a government's ... Read Answer >>
  4. How can the federal reserve increase aggregate demand?

    Learn about the Federal Reserve's role in increasing aggregate demand. Fiscal policy tends to be more effective in increasing ... Read Answer >>
  5. What's the difference between monetary policy and fiscal policy?

    Learn how monetary policy refers to bank actions to control interest rates and money supply, while fiscal policy refers to ... Read Answer >>
  6. How did John Maynard Keynes influence business cycle theory?

    Read about the impact of John Maynard Keynes on business cycle theory and the development of macroeconomics to study aggregate ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center