Economic stability

Measuring stability:
– Real output decomposed into trend and cyclical parts
– Variance of cyclical series from filtering technique
– Band-pass filter and Hodrick–Prescott filter commonly used
– Simple decomposition method involving regression
– Modeling real output as difference stationary with drift

Causes of instability:
– Lack of financial stability can lead to macroeconomic instability
– Great Recession caused by financial crisis of 2007–2008
– Highly variable money supply can lead to highly variable output level
– Milton Friedman linked variable money supply to Great Depression
– Keynesians link unstable aggregate demand to macroeconomic instability

Effects of instabilities:
– Economic instability can negatively impact welfare and investment
– Assets lose value, hindering or stopping investment
– Can lead to unemployment, economic recession, or societal collapse

Stabilization policy:
– Involves monetary policy or fiscal policy implementation
– Advocated by Keynesian economists
– Opposed by monetarists and real business cycle theorists
– Monetarists believe counterproductive monetary policy adds to output variability
– Real business cycle theorists believe policies do not address underlying causes

See also:
– Automatic stabilizer
– Stability and Growth Pact
– Global financial system

References:
– The IMF Promotes Global Economic Stability
– Economic stability
– ESCWA