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Stabilization Policy: A Reconsideration

  • Janet L. Yellen
  • George A. Akerlof

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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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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