Stabilisation policy

A stabilisation policy is a package or set of measures introduced to stabilise a financial system or economy that is in difficult circumstances. The package is usually initiated either by a government or central bank, or by either or both of these institutions acting in concert with international institutions such as the IMF or the World Bank. It usually involves some combination of restrictive fiscal measures (to reduce government borrowing) and monetary tightening (to support the currency).

Such stabilisation measures are rare for any economy. They are outside the normal monetary and budgetary framework, and become necessary following a crisis of some form e.g. an exchange rate crisis, the danger of default on international obligations (foreign debt), or a systemic threat to a national financial system or the international financial system.

Recent examples of such packages include Argentina's re-scheduling of its international obligations (where central banks and leading international banks re-scheduled Argentina's debt so as to allow it to avoid total default), and IMF interventions in South East Asia (at the end of the 1990s) when several Asian economies encountered financial turbulence.

It has been argued that the international financial system architecture needs to be reformed to avoid some of the risks (e.g. hot money flows and/or hedge fund activity) that destabilise economies and financial markets, and lead to the need for stabilisation policies and e.g. IMF interventions. Such reform has not been thoroughgoing.

copyright 2004