Stabilisation Policy in a Closed Economy Author(s): A. W. Phillips ...

296 THE ECONOMIC JOURNAL [JUNE
Two defects of a proportional stabilisation policy are im-
mediately apparent. First, complete correction of an error is
not obtained, since the correcting action continues only because
the error exists. If the spontaneous change in demand is denoted
by 8, the error in the final equilibrium level of production by c,
the proportional correction factor by fp and the marginal leakage
by 1, in the final equilibrium the sum of the spontaneous and the
policy changes in demand will be 8 -f,E. The usual multiplier
formula applies, so the total change in demand and production,
Years
O 1 2 3 4 5 6 7 8
^ _ _ _
_~~~~(C __
'-I t_ (b)
-2
P\
-3
FIG. 4
(a)
Curve (a), no stabilisation policy.
Curve (b), fp- = O5, T = 6 weeks.
Curve (c), fl, = 2, T = 6 weeks.
including the change induced by the multiplier process, will be
8 -
But the change in production is also the error, so that
_______ E, from which c e = _ + f* When this type of policy is
applied, therefore, the static multiplier becomes the reciprocal of
the sum of the marginal leakage and the proportional correction
factor, and a proportional correction factor of infinity would be
required if the error were to be completely eliminated. The
second defect of a proportional stabilisation policy is that it
tends to cause a cyclical fluctuation in the time path of production,
this fluctuation being the greater, the stronger the policy and the
longer the time lag involved in applying it.
It may be noted that the proportional correction factor and
the marginal propensity to save, or more generally any marginal
leakage, have similar effects on the stability of the system. With