Stabilization policy

economic-dictionary

Stabilization policy is the set of fiscal and monetary instruments applied by rulers in order to control the levels of inflation and unemployment in an economy.

The objective of the stabilization policy is to avoid the fluctuations that occur in the different economic variables, such as wages, prices, etc.

Said policy is an expression that is frequently used in macroeconomics, making reference to economic and monetary aggregates. Its main objective is to maintain price stability.

Objectives of the stabilization policy

Among the objectives pursued by the application of the stabilization policy, the following should be highlighted:

  • Full employment.
  • Economic growth and development.
  • Price stability.
  • Economic balance.
  • Distribution of income and wealth.

Types of stabilization policy

Two main tools are used for the application of stabilization policies.

  • Fiscal policy.
  • Monetary politics.

Based on the combination of both policies, stabilization measures are applied that try to correct situations that, if not applied, could affect the economy as well as society.

Stabilization plan of 1959

The 1959 Stabilization Plan refers to the set of economic measures approved by the Government of Spain in 1959. These policies were aimed at liberalizing the Spanish economy, as well as stabilization.

Thus, while Spain was immersed in an autarky, this plan caused economic growth in the country that led it to prosper, as well as to get out of the stagnation in which it had been immersed since the beginning of the Franco regime.

The policies adopted by said Government were based on four pillars:

  • The convertibility of the peseta and the rise in the exchange rate with the dollar, the objective of which is to provide stability to the peseta.
  • Promotion of direct foreign investment with the permission of foreign participation in Spanish companies.
  • Increase in interest rates to reduce inflation.
  • Fiscal reform to increase fiscal income, as well as a limitation of public spending to reduce the public deficit.

Thus, over time, the stabilizing effects had an optimal impact on the Spanish economy, causing the following situations:

  • Inflation fell from 12% to 2%.
  • There was a surplus in the balance of payments of 81 million dollars.
  • Increase in foreign direct investment in the country.
  • Increase in the arrival of foreign tourists to the country, as well as the take-off of the tourism sector.
  • Competition from Spanish companies improved.
  • It accelerated the incorporation of new technologies in the Spanish economy.
  • Foreign exchange reserves at the Bank of Spain increased notably.

In this way, the Spanish economy began to grow. However, the long-term effects caused the emigration of Spanish citizens.

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