Stabilization Policy: A Reconsideration

22 Pages Posted: 5 Jun 2006

See all articles by Janet L. Yellen

Janet L. Yellen

University of California, Berkeley - Economic Analysis & Policy Group

George A. Akerlof

University of California, Berkeley; National Bureau of Economic Research (NBER)

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.

Keywords: E61, E63

Suggested Citation

Yellen, Janet L. and Akerlof, George A., Stabilization Policy: A Reconsideration. Economic Inquiry, Vol. 44, No. 1, pp. 1-22, 2006, Available at SSRN: https://ssrn.com/abstract=906365

Janet L. Yellen (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510.643.1397 (Phone)
510.643.1420 (Fax)

George A. Akerlof

University of California, Berkeley ( email )

Department of Economics 549 Evans Hall #3880
Berkeley, CA 94720
United States
510-642-0822 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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