In this paper, we sidestep the debate over nominal rigidity and take the opposite approach-we study stabilization policy
in a model where all prices are flexible but there are trading frictions that money overcomes.
The simplest dimension of the theory of economic macro-management is stabilization policy
. A stabilization policy
is followed by the government in order to smooth the fluctuations of economic activity over the cycle.
Fiscal policy will be governed partly by the level of general government net lending in relation to the surplus target, and partly by stabilization policy
needs, if any.
In The Effects of Stabilization Policy
section we have shown that optimal policy leads to no correlation between policy and inflation if the effect of the policy is known precisely.
(14) Essentially, our method incorporates into the loss function itself the second-order effects of stabilization policy
on the average levels of endogenous variables in a second-order perturbation solution of the model.
Therefore, there is a clear indication that the enlargement of the monetary union could, on average, increase stability for the EMU-12, although in some cases the performance of stabilization policy
instruments might deteriorate.
And second, what do these estimates tell us about the inherent benefits from further pursuing stabilization policy
This suggests that the Federal Reserve's price stabilization policy
has credibility--participants believe the Fed will not allow inflation to accelerate in response to the energy price shocks.
In "Optimal Stabilization Policy
when Wages and Prices Are Sticky: The Case of a Distorted Steady State," Pierpaolo Benigno and Michael Woodford consider the optimal design of monetary policy when both prices and wages display considerable inertia.
Even if the level of government expenditures does not go back to the levels of the high regime and the inflation rates are still low, an increase in government expenditures will increase the probability of a switch in the regime and therefore it will signal to the economic agents that the stabilization policy
This year's symposium, "Rethinking Stabilization Policy
," examined an issue that has become increasingly important in many countries in the past few years.
This result renders the monetary policy completely ineffective as a stabilization policy