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BY 4.0 license Open Access Published by De Gruyter Open Access July 16, 2010

Stabilizing an Unstable Economy: On the Choice of Proper Policy Measures

  • Toichiro Asada , Carl Chiarella , Peter Flaschel , Tarik Mouakil and Christian R. Proaño EMAIL logo
From the journal Economics

Abstract

In the last months, the world’s economies were confronted with the largest economic recession since the Great Depression. The occurrence of a worldwide financial market meltdown as a consequence originally stemming from of the crisis in the US subprime housing sector was only prevented by extraordinary monetary and fiscal policy measures implemented at the international level. Although the world economy seems now to be slowing recovering, it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of Keynesian macro models. Fragilities and destabilizing feedback mechanisms are known to be potential features of all markets—the product markets, the labor market, and the financial markets. In this paper we focus in particular on the financial market. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential instability of the financial markets. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we also study how labor market, fiscal and monetary policies can stabilize unstable macroeconomies. Besides other stabilizing policies we in particular propose a countercyclical monetary policy that sells assets in the boom and purchases assets in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of those suggested policies.

JEL Classification: E12; E24; E31; E52

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Published Online: 2010-07-16
Published in Print: 2010-12-01

© 2010 Toichiro Asada et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

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