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

44 Pages Posted: 18 Dec 2010  

Toichiro Asada

Chuo University

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics

Tarik Mouakil

affiliation not provided to SSRN

Christian Proaño

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

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. --

Keywords: Monetary business cycles, portfolio choice, (in-)stability, stabilizing policy measures

JEL Classification: E12, E24, E31, E52

Suggested Citation

Asada, Toichiro and Chiarella, Carl and Flaschel, Peter and Mouakil, Tarik and Proaño, Christian, Stabilizing an Unstable Economy: On the Choice of Proper Policy Measures (2010). Economics: The Open-Access, Open-Assessment E-Journal, Vol. 4, 2010-21. Available at SSRN: https://ssrn.com/abstract=1726891 or http://dx.doi.org/10.5018/economics-ejournal.ja.2010-21

Toichiro Asada (Contact Author)

Chuo University ( email )

2nd floor Blg 4 Tampa Campus
742-1 Higashinakano, Hachioji
Tokyo 192-03
Japan

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Tarik Mouakil

affiliation not provided to SSRN

No Address Available

Christian Proaño

affiliation not provided to SSRN ( email )

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