Will It Hurt? Macroeconomic Effects of Fiscal Consolidation

The IMF has released the October 2010 World Economic Outlook. Chapter 3 studies the effects of fiscal consolidations on economic activity.

3 replies on “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation”

All couched in terms of offsetting easing of monetary policy and falls in the exchange rate.
Move along, nothing of relevance here.

I admire Simpleton’s confidence that there is nothing of relevance.

Finance ministers the world over will be jetting off to Washinghton DC for the IMF annual meetings shortly now. Already the bulk of the Global Financial Stability Report and the World Economic Outlook have come out , with the remaining chapters published over the next days. Both are appropriately glum on the Outlook The IMF’s calculations (see p7, Table 3.2, 1980–2009 for the 15 countries in the IMF’s sample) indicate that fiscal consolidation of 1% of GDP reduces output by about 0.5% within two years and raises the unemployment rate by about 0.3pp, with domestic demand falling by about 1%. Yet we need several percentage point cuts in budget deficits to avoid yet more sovereign crises. And that is even before counting how much generosity some governments want to show to banks and their investors.
Some finance ministers will be meeting the IMF > those that are rolling in cash won’t be asking for aid – they’d be laughed out of court

The IMF is still pushing – as it ought to – fiscal measures with little upfront cost but that pack a big punch over many years (eg pension reform). What is distressing is that governments are so slow to start taking the medicine, as evidenced by the handholding by the European authorities of some governments that has now begun over the past week (cf Rehn’s comments of late). This does not raise confidence that the medicine will be taken in time, voluntarily.

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