Economic stabilization . It consists of reducing or minimizing cyclical variations in the level of economic activity of a country and in the General Price Level .
General
In general, economic stability is considered a desirable situation because in a period of stability the uncertainty faced by economic agents is much less. And given that in general economic agents have a dislike for risk, the existence of uncertainties hinders economic activity, leading to temporary imbalances and, in general, social insecurity and a fall in income levels. The economic stability is reflected in the constancy or little variation over time of three conceptually independent although economically related aspects:
- Maintaining full employment.
- The stability of the General Level of internal Prices.
- The external balance.
The high instability of the level of employment translates into economic conflicts when the level falls, strongly decreasing price levels tolerate deflation that is usually accompanied by a decline in economic activity and generally increasing unemployment. Then the imbalance in the balance of payments may involve speculative financial attacks, devaluations of the currency and alteration of price levels.
Stabilization measures
Any attempt to attack inflation will mix difficulties and risks, and it is also a long process because restrictive measures tend to reduce production and employment before benefits become apparent. On the other hand, expansive fiscal and monetary measures tend to develop the level of economic activity before prices rise.
These economic and political risks explain why expansionary policies predominate. Stabilization measures nullify the effects of inflation and deflation by restoring the normal level of economic activity. To be effective, these measures have to be permanent and not just temporary adjustments, which often only exacerbate cyclical variations.
The essential requirement to fight inflation implies that the amount of money and bank credit grow at a stable rate depending on the growth needs of the real and financial economy. The central banks can determine, in the long term, the availability of money and credits by controlling the necessary financial reserves, and with other types of measures. The monetary constraint during cyclical recessions allows for financial recovery.
The monetary powers cannot impose economic stability if private investment and consumption continue to create inflationary or deflationary pressures, or if the rest of economic policy contradicts anti-inflationary monetary policy. The spending public and tax policy must be consistent with monetary action in order to achieve stability and avoid excessive swings in economic policy. Governments have to finance their huge budget deficits either by borrowing or by issuing money.
If this last measure is accepted, inflationary pressures inevitably appear. The only way to make stabilization measures effective is by maintaining a stable and coordinated monetary and fiscal policy. It is also necessary to take measures from the supply side to fight inflation and avoid the effects of economic stagnation due to deflation.
Among the possible measures to be taken from the supply side are the incentive measures for saving and investment; increased spending for the development and application of New technologies ; improving management technique and work productivity through education and work experiences; greater efforts to keep the value stableof raw materials and to develop new resources; and the reduction of excessive government regulation. The application of income policies to fight inflation. These policies range from government impositions on price levels, wages, rents, and interest rates to tax incentives, or simply recommendations made by governments.
Government intervention could complement the main economic, monetary and fiscal measures. It is possible that future stabilization measures will be based on coordinating monetary and fiscal policies and increasing efforts from the supply side to maintain productivity and develop new technologies. All the issues related to inflation, deflation and the policies associated with these problems are becoming more important due to the increasing mobility of investment and the speculation of international markets that are increasingly interrelated.
