Why NOT use stabilization policies?
While the previous analysis may lead you to think that stabilization policies SHOULD be used, there are solid arguments against using them. The argument most often cited is that both monetary and fiscal policies work with a substantial lag. For monetary policy, realize that households and firms plan their investment expenditures (whether on a new house or on plant and equipment) in advance – therefore, a change in the interest rate may NOT change investment spending immediately. Fiscal policy has a more complicated lag – any change in government spending or taxation has to FIRST go through the congress, and SECOND be signed by the President. This political process can take months or years. The problem with using stabilization policies in the face of lags is that economic situations may change between the implementation of the policy and its effect on the economy. It’s very possible that, by the time stabilization policy takes effect, policymakers don’t want it anymore. Additionally, th
