What is a Stabilization Policy?

Stabilization policy refers to a strategy implemented by the government of a nation to ensure that the economy is steady, this policy reduces price fluctuations in an economy through the implementation of certain measures and monitoring the economic cycle. Given that the economy rises and falls, governments implement fiscal policy or monetary policy to keep the economy in check. Stabilization policy is a remedy that central banks or governments use to prevent irregular and unpredictable changes in price which affects the gross domestic product (GDP) and output of an economy. Stabilization policy is often used as both an economic and discretionary policy that keeps the economy in a healthy state. Rises and falls occur in an economy, this might occur naturally or due to unnatural causes. Several factors, including inflation and deflation upturn the economy and it is the duty of governments and central banks to keep the economy steady. Stabilization policy is one of the economic policies that the government uses to maintain a good level of economic growth and prevent surges and erratic price movements in the economy. As the name implies, stabilization policy helps to stabilize the economy through effective control of aggregate demand and supply in an economy, healthy price levels and adequate monitoring of trading in the economy.

The Roots of Stabilization Policy

John Maynard Keynes was the first economist who introduced the stabilization policy as a key process to stop or prevent erratic movements and surges in the prices of goods in an economy. Central to the stabilization policy is the control of aggregate demand in an economy. Sudden changes in price can affect many aspects of an economy, including employment rate, money supply, and others. There are many instances where stabilization policies can be deployed or used by governments and central banks. During financial shock or economic crisis, stabilization policy can be used as a recovery mechanism to get the economy stabilized. The policies can also be implemented to prevent surge or erratic deflation and inflationary movements in an economy.

The Future of Stabilization Policy

Generally, fiscal and monetary policies will continuously be used by central banks and governments of nations that keep the economy in a healthy state. Stabilization policy as a key fiscal policy will be needed even in the future. Given the continuous demand that governments maintain good economic growth and stable price levels, stabilization policy will remain a vital economic tool.

Related Topics

• What is Government Spending?
• Autonomous Spending
• Autonomous Consumption
• Fiscal Policy
• Expansionary Fiscal Policy
• Contractionary Fiscal Policy
• Progressive vs Regressive Tax
• Marginal Tax Rates
• Proportional Tax
• Trickle Down Theory
• Discretionary Fiscal Policy
• Automatic Stabilizers
• Effects of Discretionary Policy (Interest Rates & Lags)
• Crowding Out Effect 
• National Debt
• Government Borrowing
• Golden Rule
• Ricardian Equivalence
• Balanced Budget - Deficit and Surplus
• National Debt
• Standardized Employment Budget
• Deficit Hawk
• Austerity
• Twin Deficits
• Fiscal Policy and the Aggregate Supply and Demand Curve
• Stabilization Policy
• Robin Hood Effect
• Ricardo Barro Effect
• Automatic Stabilizers
• Standardized Employment Budget
• How Does Fiscal Policy Affect Interest Rates? 
• Crowding Out
• Types of Lag in Fiscal Policy
• Temporary and Permanent Fiscal Policy
• Limitations of Fiscal Policy?
• How Politics Affects Discretionary Fiscal Policy
• Government Borrowing
• National Savings and Investment Identity
• Debtor Nation
• Fiscal Policy Affects Trade Balances
• Twin Deficits
• Exchange Rates Affect Budget and Trade Deficits
• What are the risks of chronic large deficits in the United States?
• How Fiscal Policy Can Affect Trade Imbalances
• Government Borrowing Affect Private Savings
• Ricardian Equivalence
• Fiscal Policy Affects Investment and Economic Growth
• Crowding Out of Physical Capital Investment?
• How Does Government Borrowing Affect Interest Rates in Financial Markets?
• Government Investment in Physical Capital
• Public Investment in Human Capital
• Fiscal Policy Can Affect Technology Development

• Economic Cycle or Business Cycle
• Business Cycle Indicator
• Peak and Trough
• Recession and Depression
• Hard Landing vs Soft Landing
• Economic Bubble
• Boom and Bust Cycle
• Great Depression
• Baby Boomer Age Wave Theory

• Skyscrapper Effect (Economics)
• V-Shaped Recovery
• W-Shaped Recovery
• U-Shaped Recovery
• Kondratieff Wave Cycle
• Contagion
• Feedback Rule Policy
• American Customer Satisfaction Index
• CNN Effect
• Bureau of Economic Analysis
• Business Starts Index
• American Recover and Reinvestment Act
• Abenomics
• Emergency Economic Stabilization Act of 2008
• Commodity Credit Corporation
• Humphrey Hawkins Act

• Real Economic Growth Rate
• Fox-Trot Economy

• Stagnation
• Neoclassical Growth Theory
• Exogenous Growth Theory
• Endogenous Growth Theory
• New Growth Theory - Explained
• Classical Growth Theory - Explained
• Real Economic Growth Rate - Explained
• Plutonomy