Question

how to make an economy stable or to bring economic stability?

Answer 1

This is impossible because of nature of life. ))

Answer 2

the 70s and 80S were better bcz all economies were not interdependent and now its complex to resolve and bring back the economic stability

Answer 3

Your question is a bit on the theoretical side and so my answer will have to be as well. If you dont quite catch all the details dont worry its mainly the conclusion that matters.

Well on the macroeconomic level we generally see that uncertainty is the cause of most instability in our models. Granted, in certain cases we introduce shocks to the model in order to see how the economy responds, but under the assumption of consumption smoothing what you would see is that people in the economy would instantly adapt to the shock and therefore end any instability. From this we really have to question our assumption of perfect information, which of course is unrealistic.

Without the assumption of prefect information, what we are really looking at is the agents in the economy making their own assumptions and estimates as to how to smooth consumption in the face of a shock. This however is impossible to model, but we can generalize that this sort of system would generate a great deal of instability as these agents tried to move appropriately. Eventually, we would see a new steady state established which would bring an end to the instability.

Now, that is based upon a single shock to the economy and no changes after that shock is made. In the real world however, there are shocks every day which throw thing into disequilibrium. That is perfectly normal and a part of any economy. However when we see an excessive persistent state of instability, this is the cause of a great deal of problems. The question really is what is causing this persistent state and how do we eliminate that cause.

As stated before we will come back to a steady state eventually as agents adjust to the shock. If there are continued disruptions or increased uncertainty though this can cause the adjustment to be delayed or to never be made at all. Therefore in order to restore stability what we need to do is to try to remove uncertainty in the economic system.

One of the best ways to do this in my opinion is to try to reduce the amount of political uncertainty which can throw off estimates of the future economic circumstances. This is in part the trouble that the US economy is currently experiencing, since no one know how exactly we will enact things like, Dodd Frank, the new healthcare, and how we will approach a new tax system or the issue of debt reduction. Admittedly there are other things you can do to reduce uncertainty, but the political uncertainty seems to be the easiest to tackle since it is all man made. Hope this gets you thinking and good luck with your econ work.