This is a strategy adopted by the government through the Central Bank to control macroeconomic shocks due to fluctuation in wages and prices of goods and services. Stabilization may include monitoring the business cycle and interest rate regulation by the central banks. Moderation of these factors leads to changes in unemployment rate, recovery of an economy from economic shock control borrowing and money supply. In general terms stabilization are used to regulate the fluctuation of business cycle. There are two main elements of stabilization policies, that is, monetary and fiscal policies.
Elements of Stabilization Policies
This is the process through which the Central Bank controls the money supply and interest rate in order to curb inflation and control currency stability, maximizing national income. Often, monetary policy focuses on rate of interest for purposes of promoting economic growth and stability. Monetary policy is one of the way through which the government can impact the economy through effective cost of money, the government reserve can affect the amount of money spent by consumers and businesses. Monetary policy uses contraction monetary policy to slow down the economy, without pushing the economy into recession. Government uses expansionary monetary policy if it wants to increase money supply in an economy, by combining open market operations, interest rate and reserve requirement.
Fiscal policy involves use of government spending, taxation and borrowing, to influence the levels and growth of the economic aggregate demand output and employment. The main goal is to stimulate the economy in relation to the phases of the business cycle. Through the fiscal policy, the government tries to impact economic outbreaks as the unemployment rate and gross domestic product, this result to increase in wide economic demand of goods and services leading to high employment rate and growth. Government can use expansionary fiscal policy to increase government spending and reduce taxes to curb recessive economy.
The stabilization policies have been effective in scenarios where they are both used together in an economy, since there will be economic situation when the fiscal policy is not appropriate and monetary policy is the solution.
Langdana, F. K. (2009). Macroeconomic policy: Demystifying monetary and fiscal policy. New York: Springer.