In macroeconomics, macroeconomic stability is defined as a period of uninterrupted economic growth, with a normal distribution of the wealth of society and the absence of extreme fluctuations. The basic theory that defines macroeconomic stability is that all economic variables, including those that are affected by external influences, tend to follow the same general laws of economic growth. These laws include equilibrium, in which the distribution of the resources is constant. This is a very important concept for the macro economics field.
In macro-economic stability, the trend or cyclic component is decomposed into a cyclical component and a non-cyclical component, in which the fluctuation of the non-cyclical series is the main indicator of the departure from macroeconomic stability. These two different components of a trend or cyclic series can be viewed as being interrelated. When one component of the trend or cyclic series is increasing, the other component will also tend to increase and so on. Thus, the trend or cyclic component of an economic cycle is said to be said to have reached the point of stability when the other components are at the same level and this level of stability is indicated by a steady rise in the price level.
Macroeconomic stability is most important when the prices are affected by a change in the value of money and when the prices have been fluctuating for a long time period, especially if they have been increasing or decreasing for such a long period of time. It is said that macro-economic stability can be achieved only after a consistent increase or decrease in the prices, because in this case there is no scope for cyclic or non-cyclic processes.
There are many ways in which the level of stabilization can be attained, including the use of fiscal, monetary policies and other methods like central banking and interest rates. In most cases, when the stabilizing policies of fiscal and monetary policies are used, the process of stabilization takes place immediately after the initial level of stabilization has been achieved. However, the use of other methods such as central banking and interest rates does not necessarily imply that the stabilization process takes place immediately. This is because interest rates may tend to decrease further during the period of stabilization as they adjust their rates to keep up with the fluctuating market interest rates and this may result in a reduction in the level of stabilization.
The concept of stabilizing policy has to be studied carefully so as to obtain the desired level of stability in a given period of time. Many studies have also been done to look at the effect of interest rates, monetary policies, and the use of fiscal policies in stabilizing a state of macroeconomic stability. For example, there are studies that show that the lower the interest rates, the higher the stability level is in a state.
Studies also show that when the stabilization process is applied for a longer period of time, it results in a much higher level of stabilization. Therefore, a study should be made on the effectiveness of stabilizing policies and how it compares to other stabilization . . . . . . processes. There is also a need to evaluate the extent to which a state is stable and whether or not it is in fact stable enough.