Such countercyclical monetary policy is one example of a stabilization policy. Other examples of U.S. stabilization policies include the federal insurance of bank deposits (and the concomitant supervision and regulation of banking) and income-maintenance programs, such as unemployment insurance.
Macroeconomists have devoted much effort to understanding how countercyclical monetary policy affects the volatility of the unemployment and inflation rates. In contrast, macroeconomists have directed much less effort to understanding why countercyclical monetary policy is beneficial. This neglect reflects the fact that, until recently, macroeconomists of very different persuasions agreed that policies aimed at reducing the volatility of unemployment and inflation are desirable. Of course, economists disagreed about what form those policies should take, but no one questioned the premise that a less volatile macroeconomic environment was a desirable policy goal.
This article appeared in the Second Quarter 2001 edition of Business Review.View the Full Article