ABSTRACT
Central governments have three traditional functions: macroeconomic stabilization, efficiently allocating societal resources and altering the distribution of resources. To the extent fiscal and monetary policies cannot stabilize key macroeconomic variables, in addition to contributing to weak economic growth, users of basic services and programs suffer. Public budgets cannot be planned beyond the very short term and their implementation is interrupted by constant funding shortages. Consumers must deal with price inflation and firms cannot pay for imports priced in dollars or euros in often deflated local currency. Macroeconomic instability at a minimum results in unreliable service, program, and project delivery. At the strategic level, macroeconomic instabilities are evident in phenomena such as: deflation, hyperinflation, deep recessions, high unemployment, low investment, greater poverty, and income inequality, all of which produce severe economic losses. Stabilization policy refers to the role of governments in maintaining employment, price stability, and economic growth through fiscal and monetary policy.
