Stabilization policy and political cycle

Abstract

In the market economy the economic growth is the cyclical one. In the economic literature we can find arguments which justify the necessity of attempts to decrease the amplitude of cyclical fluctuations, as well as arguments indicating the negative effects of stability reactions. Over the years, the scope and role of intervention has been the sticking point. However, assuming that the anti-cyclical policy brings more benefits than costs, it is difficult to indicate one explicit response to the question, if for the stabilisation of economic situation shall we use rather the tool of fiscal policy or the monetary one. Economists who are in favour of Keynes doctrine support the fiscal intervention. These who are related to the liberal mainstream will veer towards higher monetary authority leadership. The discrecional activities, undertaken by politicians, pose a risk of using the available instruments for the self-interest. As a result it can lead to the political business cycle instead of economic stabilisation. In effect, the costs of this countercyclical policy may outweigh the benefits arising from it. It is especially visible in the case of fiscal policy. Democratic system with the recurrent election periods is not the system which enables leading effective stabilization policy using fiscal policy tools. (original abstract)