Discussion Paper

No. 2009-50 | November 30, 2009
Stabilizing an Unstable Economy: On the Choice of Proper Policy Measures


Currently, many monetary and fiscal policy measures are aimed at preventing the financial market meltdown that started in the US subprime sector and has spread worldwide as a great recession. Although some slow recovery appears to be on the horizon, 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 in particular focus 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 for financial market instability. 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 study the potential that labor market, fiscal and monetary policies have to 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.

Paper submitted to the special issue
Managing Financial Instability in Capitalist Economies

JEL Classification:

E12, E24, E31, E52



Cite As

Toichiro Asada, Carl Chiarella, Peter Flaschel, Tarik Mouakil, Christian R. Proaño, and Willi Semmler (2009). Stabilizing an Unstable Economy: On the Choice of Proper Policy Measures. Economics Discussion Papers, No 2009-50, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-50

Comments and Questions

Anonymous - Comment
December 18, 2009 - 15:49

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Anonymous - Refree Report 1
January 07, 2010 - 09:04

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Anonymous - Referee Report 2
January 08, 2010 - 12:07

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Christian Proaño - Reply to Referee Reports 1 and 2
May 19, 2010 - 09:01

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