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CHAPTER FOURTEEN
Stabilization Policy
Mannig J. Simidian
Chapter
Fourteen
As we learned, since policy only affects the economy after a long lag,
successful stabilization requires the ability to predict future economic
conditions.
One way forecasters try to look ahead is with leading indicators. A
leading indicator is a data series that fluctuates in advance of the
economy. A large fall in a leading indicator signals that a recession
is more likely.
Another way forecasters look ahead is with macroeconometric models,
which have been developed by both government agencies and by
private firms. They seek to predict variables such as unemployment and
inflation and other endogenous variables.
Chapter
Fourteen
Chapter
Fourteen
Opportunistic
Opportunisticpolicymakers
policymakerstake
takeadvantage
advantageof
of
an
anexploitable
exploitablePhillips
Phillipscurve
curveand
andface
facenave
navevoters
voterswho
who
forget
forgetthe
thepast,
past,are
areunaware
unawareof
ofthe
thepolicymakers
policymakers
incentives,
incentives,and
anddo
donot
notunderstand
understandhow
howthe
theeconomy
economy
works.
works.In
Inparticular,
particular,politicians
politiciansdont
donttake
takeinto
intoaccount
accountthe
the
trade-off
trade-offbetween
betweeninflation
inflationand
andunemployment
unemploymentwhen
whentheir
their
political
politicalgain
gainisisatatstake.
stake.
Chapter
Fourteen
Chapter
Fourteen
10
11
Monetarists are economists who advocate that the Fed keep the money
supply growing at a steady rate. Monetarists believe that fluctuations in
the money supply are responsible for most large fluctuations in the
economy. They argue that slow and steady growth in the money supply
would yield stable output, employment and prices.
LRAS
P
Here we can see that this economy is
growing (LRAS is shifting rightward)
so continued increases in the supply of
money (via +AD) dont necessarily
P*
AD'' imply increases in inflation.
AD'
AD
Chapter
Fourteen
Y Y' Y'' Y
12
13
14
Inside
Insideand
andoutside
outsidelags
lags
Automatic
Automaticstabilizers
stabilizers
Leading
Leadingindicators
indicators
Lucas
Lucascritique
critique
Political
Politicalbusiness
businesscycle
cycle
Time
Timeinconsistency
inconsistency
Monetarists
Monetarists
Chapter
Fourteen
15