Best Economic Practices for Long-Term Business Cycle Stability


There has probably been an economic debate on this site before of similar nature, but since I haven’t seen many recently or haven’t posted in a while, I thought I would contribute.
We have an economic school of though thread somewhere, but I don’t feel like the ideologies were ever explored super heavily, so I thought I would make this thread.

In a market economy, which practices or lack thereof are best tailored to stabilizing the business cycle and producing an environment which is conducive to long term growth and stability?


If your goal is to sustain the capitalist system, seems the best way is with mild government intervention in the economy, and a low business tax with hard caps for environmental regulation.

The government should be allowed to give financial stimulus packages in situations where mass job loss, etc could occur. The government should ideally start to focus more effort into promoting vocational education.

But of course I don’t want to sustain the capitalist system and would prefer large businesses figuratively burned to the ground.


Since the move away from Keynesianism, this is universally influenced through the control of base rates. However evidence as of recent says that in a deep trough, a reduction in interest rates in itself is not enough. Hence they’re more often there to stabilise at a constant level rather than influence economic activity significantly.


I would argue that interest rates actually do have a rather significant role in greater economic change. Changing if the federal funds rate is more often used than quantitative easing, and has been responsible for many of the Keynesian policies pursued by the Fed. Take for example the inflation of the '70s and '80s. This inflation was largely decreased by an increase in interest rates. The Great Recession also may have been worse if The Federal Reserve hadn’t stopped pursuing their goal of a 2% interest rate. It’s really only during liquidity traps that interest rates approach zero that render lowerings of The Federal Funds rate futile. Even so, quantitative easing and fiscal policy can potentially allow for the following of Keynesian policy during such a liquidity trap.

I will agree however that the federal funds rate is also vital in maintaining stability as well as creating it. Take the Great Moderation for example, and adherence to the Taylor Rule. This period of 20 years in which business cycle volatility declined by two-thirds on average is a phenomenal example of such.