Global economic stability

Compiled By:

gaurav
bhaglal
Sumit Singh
CONTENTS
 Introduction
 Why it is Important
 Factors impacting Global Economic Stability
 Business Cycle
 Financial Crisis
 Stability and Growth Pact
 Fiscal Policy
 Monetary Policy
 Automatic Stabilizer
INTRODUCTION
 Economic stability refers to an absence of
excessive fluctuations in the macroeconomy.
macroeconomy An
economy with fairly constant output growth and low
and stable inflation would be considered
economically stable

 Unstable Economy: An economy with frequent

large recessions, a pronounced business cycle, very
high or variable inflation, or frequent financial crises
would be considered economically unstable
WHY IT IS IMPORTANT
 Avoiding Economic & Financial Crisis

 Avoiding large swings in economic activity, high

inflation, and excessive volatility in exchange rates
and financial markets

 Dynamic market economy

 Countries are becoming ever more interconnected

Factors impacting global
economic stability
 Business cycle
 Financial Crisis
 Stability and Growth Pact
 Fiscal Policy
 Monetary Policy
 Automatic Stabilizer
BUSINESS/economic CYCLE
 Economy-wide fluctuations in production or
economic activity over several months or years

 Fluctuations are often measured using the growth

rate of real gross domestic product

 Unemployment high – Monetary & Fiscal Policy

smoothing role

 Mitigation - Govt. should increase the demand

Cont…
 External (exogenous) versus internal (endogenous)
causes of the economic cycle

 Credit/ debt cycle

 Real business cycle theory

 Politically based business cycle

Financial crisis
Financial crisis includes:

 Stock market crashes

 Financial bubbles
 Currency crisis
 Banking panics
 Many recessions coincided with these panics
Types of Financial crisis
 Banking crisis

 Speculative bubbles and crashes

 International financial crisis

 Wider economic crisis

Stability and Growth Pact
 The Stability and Growth Pact (SGP) is an
agreement by European Union member states related
to their conduct of fiscal policy, to facilitate and
maintain Economic and Monetary Union of the
European Union

 The pact was adopted so that fiscal discipline would

be maintained and enforced in the EMU
FISCAL POLICY
 Fiscal policy was invented by John Maynard Keynes
in the 1930s.
 Fiscal policy is the use of government spending and
revenue collection to influence the economy.
 The two main instruments of fiscal policy are
government spending and taxation.
 The three possible stances of fiscal policy are:-
 1. Neutral Stance- Where G = T.
 2. Expansionary Fiscal Policy -
Where G > T.

 3. Contractionary Fiscal policy -

Where G < T.
MONETARY POLICY
Monetary policy is the process by which the
government, central bank, or monetary authority of a
country controls:-
II. the supply of money
III. availability of money
IV.cost of money or rate of interest

in order to attain a set of objectives oriented towards

the growth and stability of the economy
AUTOMATIC STABILIZER
 Automatic Stabilizer work as a tool to dampen
fluctuations in real GDP without any explicit policy
action by the government. It is a government
program that changes automatically depending on
GDP and a person’s income.
 For example:-
 Induced Taxes – Like Income Tax and Corporation
Tax.
 In an economic boom tax revenue is higher and in
a recession tax revenue lower.
 Transfer Payments – Like unemployment and
welfare benefits.
 Government expenditure increases automatically in
recessions and decreases automatically in a boom.
 AN K
T H
Y O U
OPEN FOR DISCUSSION