Rethinking stabilization policies; Including supply-side measures and entrepreneurial processes

Abstract

Abstract Traditional macroeconomic stabilization policies seek to moderate swings in economic activity through measures that primarily augment aggregate demand. Such measures are, however, inadequate in mitigating the comprehensive effects of crisis such as the COVID-19, which affects both the demand and supply sides of the economy. Moreover, monetary policies are presently close to a liquidity trap combined with weakened transmission links to the real economy. Fiscal policies have been reactivated, albeit in an ad hoc and experimental manner. Based on a literature review and the policy responses following the COVID-19 crisis, the objective is to present a modified and extended framework for stabilization policies. In particular, the importance of microeconomic supply-side measures that promote entrepreneurial processes and knowledge-upgrading efforts are emphasized. Furthermore, a coherent realigning of policies at the micro- and macro-levels is argued to enhance the potential for long-term growth and to facilitate the restructuring of an economy that normally follows a crisis.