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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. 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.
  2. Ho-Chuan Huang & WenShwo Fang & Stephen M. Miller, 2012. "Does Financial Development Volatility Affect Industrial Growth Volatility?," Working papers 2012-45, University of Connecticut, Department of Economics.
  3. 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.
  4. Hannsgen, Greg, 2008. "The welfare economics of macroeconomics and chooser-dependent, non-expected utility preferences: A Senian critique with an application to the costs of the business cycle," The Journal of Socio-Economics, Elsevier, vol. 37(5), pages 1980-1993, October.
  5. Alfonso Palacio-Vera, 2006. "On Lower-bound Traps: A Framework for the Analysis of Monetary Policy in the ÒAgeÓ of Central Banks," Economics Working Paper Archive wp_478, Levy Economics Institute, The.
  6. repec:ebl:ecbull:v:30:y:2010:i:1:p:543-557 is not listed on IDEAS
  7. Sebastian Dullien & Ulrich Fritsche, 2006. "How bad is Divergence in the Euro-Zone? Lessons from the United States of America and Germany," Macroeconomics and Finance Series 200605, Hamburg University, Department Wirtschaft und Politik.
  8. 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," Macroeconomics and Finance Series 200702, Hamburg University, Department Wirtschaft und Politik.
  9. 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.
  10. Wang, Peng-fei & Wen, Yi, 2011. "Volatility, growth, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1696-1709, October.
  11. Ho-Chuan (River) Huang & Stephen M. Miller, 2012. "Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility," Working Papers 1206, University of Nevada, Las Vegas , Department of Economics.
  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.
  13. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96, CPB Netherlands Bureau for Economic Policy Analysis.
  14. Greg Hannsgen, 2007. "Are the Costs of the Business Cycle 'Trivially Small'?," Economics Working Paper Archive wp_492, Levy Economics Institute, The.
  15. 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.

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