The use of economic policies to reduce fluctuations. This may be applied at the macroeconomic level, to reduce fluctuations in real incomes, unemployment, inflation, or exchange rates, or at the microeconomic level, to reduce fluctuations in the prices of particular goods. Where a system is subject to stochastic shocks, to the extent that these can be predicted, stabilization policy can work by either preventing or offsetting them. If the shocks cannot be forecast or offset without time lags, some fluctuations are inevitable, and stabilization policy can seek only to reduce them.
Subjects: Economic History.