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Stabilization Policy: A Reconsideration

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  • Janet L. Yellen
  • George A. Akerlof

Abstract

Should stabilization policy be a macroeconomic priority? Most central banks consider it a goal, but Robert Lucas has contended that policies to stabilize output, even if effective, yield negligible welfare gains. This article critiques Lucas's argument. Existing literature suggests nontrivial benefits from stabilization due to nonlinearity of the social welfare function and of the short-run Phillips curve. Our analysis and examination of the evidence from periods of prolonged high unemployment also suggest further significant gains to stabilization since the "accelerationist" hypothesis does not seem to hold in times of very low inflation. (JEL E61, E63) Copyright 2006, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 44 (2006)
Issue (Month): 1 (January)
Pages: 1-22

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Handle: RePEc:oup:ecinqu:v:44:y:2006:i:1:p:1-22

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Vice Chair Janet L. Yellen: Perspectives on Monetary Policy
    by Guest Author in The Big Picture on 2012-06-07 11:05:32
  2. Full text: Janet Yellen – Perspectives on Monetary Policy
    by Guest Author in Credit Writedowns on 2012-06-07 13:10:28
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Cited by:
  1. repec:ebl:ecbull:v:30:y:2010:i:1:p:543-557 is not listed on IDEAS
  2. Sebastian Dullien & Ulrich Fritsche, 2008. "Does the dispersion of unit labor cost dynamics in the EMU imply long-run divergence?," International Economics and Economic Policy, Springer, vol. 5(3), pages 269-295, November.
  3. Derek Stimel, 2010. "Choice of Aggregate Demand Proxy and its Affect on Phillips Curve Nonlinearity: U.S. Evidence," Economics Bulletin, AccessEcon, vol. 30(1), pages 543-557.
  4. Wang, Peng-fei & Wen, Yi, 2011. "Volatility, growth, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1696-1709, October.
  5. Ho-Chuan Huang & WenShwo Fang & Stephen M. Miller, 2012. "Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility," Working papers 2012-26, University of Connecticut, Department of Economics.
  6. Ho-Chuan (River) Huang & Stephen M. Miller, . "Does Financial Development Volatility Affect Industrial Growth Volatility?," Working Papers 1302, University of Nevada, Las Vegas , Department of Economics.
  7. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
  8. Greg Hannsgen, 2007. "Are the Costs of the Business Cycle 'Trivially Small'?," Economics Working Paper Archive wp_492, Levy Economics Institute, The.
  9. Janet L. Yellen, 2007. "Implications of behavioral economics for monetary policy," Speech 41, Federal Reserve Bank of San Francisco.
  10. Sebastian Dullien & Ulrich Fritsche, 2007. "Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-Run Divergence?: Results from a Comparison with the United States of America and Germany," Discussion Papers of DIW Berlin 674, DIW Berlin, German Institute for Economic Research.
  11. Derek Stimel, 2009. "An examination of U.S. Phillips curve nonlinearity and its relationship to the business cycle," Economics Bulletin, AccessEcon, vol. 29(2), pages 736-748.
  12. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-49.

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