IMF on Fiscal Multipliers – More Notes

The dataset underlying the empirical exercise is available here.

The general message that the IMF on average underestimated the impact of fiscal austerity on output growth is plausible; it is also important to acknowledge that the cross-country correlation between the scale of fiscal austerity during 2010-2011 and growth forecast errors is far from perfect.

Of the 9 countries with expected fiscal tightening of greater than 1 percent of GDP in 2010-2011, there was certainly overoptimism about Greece, Romania, UK, Slovenia and Portugal (growth undershoots of 7.1 percent, 5.2 percent, 1.1 percent, 2.0 percent and 1.1 percent respectively).  The growth undershoot for Ireland was 0.1 percent (ie close to zero),  while Spain had a slight overshoot (+0.2 percent) and Belgium a larger overshoot (+1.7 percent).

The empirical exercise is linear so the results are also influenced by the nature of growth forecast errors in countries experiencing fiscal relaxation.  Of the 5 countries with expected fiscal relaxation above 1 percent of GDP in 2010-2011,  there were positive growth surprises for 4 countries (Finland +3.2 percent; Austria +2.4 percent; Cyprus +0.4 percent; Germany +3.7 percent) while Denmark had a small growth undershoot (-0.4 percent).

(All numbers rounded to 1 decimal place.)

It will be interesting to see updates of this work in relation to fiscal adjustment and growth performance in 2012.

18 thoughts on “IMF on Fiscal Multipliers – More Notes”

  1. i would be careful of over or undershoots to GDP of big exporters like Germany or, even Ireland. Germany may now be about to undershoot, with little to to with fiscal policy.

    On a broader point I always found it lamentable that economists calculating or estimating multipliers had such little common sense that they failed to understand the fact that war-time data would underestimate the multiplier.

  2. There’s not much point in debating whether a multiplier is 0.9 or 1.4 or whatever. Sane people have known for a long time that counter-cyclical fiscal policy makes sense and pro-cyclical policy doesn’t. The question is, how do we get policy-makers to pay attention?

  3. @kevin d

    “The question is, how do we get policy-makers to pay attention?”

    Once you cam get consensus on a reasonably informed site like this, you might have a convincing roll-out to the political community and the retail public.

    I humbly submit the “H” argument in comments on John mch’a thread for discussion 😉

  4. @kEvin
    How to get them to pay attention?

    You won’t. They are on a different wavelength.

    Just got a leaflet to constituents from Lucinda. She claiming they have solved everything with a debt reduction on our mountain of debt.

    Quote….” This outcome is the result of sustained work by the Government…….. the reduced costs which stem from the reduction in our debt burden will have hugely positive impact on budgetary position in subsequent years”.

    So there you are. Problem solved.
    Pity nobody told her about the Helsinki trio or Mario’s comments today.

  5. Fiatlux : an auld scan of that emailed to me would lift my day. And there was me on the wireless worrying we would have to get stroppy. And here the problem is solved.

  6. “The growth undershoot for Ireland was 0.1 percent (ie close to zero)”

    Only if GDP is the measure of growth. As the most recent quarterly national accounts data from CSO have shown, both the GDP measure and the GNP measure are hugely distorted by the activities of the MNCs.

    In 2011 GNP contracted by 2.5% and domestic demand, the portion of the economy most directly affected by ‘austerity’, contracted by 4.3%. This puts Ireland firmly back on the regression distrbution line of the IMF’s table.

    While there maybe outliers in other countries, if Irish domestic demand is considered, Ireland isn’t one of them. Austerity isn’t working here either.

  7. @Kevin Donoghue

    There’s not much point in debating whether a multiplier is 0.9 or 1.4 or whatever. Sane people have known for a long time that counter-cyclical fiscal policy makes sense and pro-cyclical policy doesn’t. The question is, how do we get policy-makers to pay attention?

    There are few things as dangerous as a bad idea, reading John McHale’s disappointingly equivocal last post here on the failure of austerity (just for Greece mind you, and only because of a rare second species of less spotted confidence fairy) I think that many of the current crop of economists will never give up on expansionary fiscal contraction and we might be better replacing them rather then trying to convince them with reason about what is, in point of fact, a deeply held ideological position.

    It is dispiriting to read paragraphs like this.

    Even allowing for two-way feedback between the deficit and GDP, standard analysis shows that, all else equal, changes to the structural primary balance do lower the actual primary balance.

    If the model does not fit the way the economy behaves might it be time to use a different model rather than restructure the economy so it better resembles the model?

    Krugman is reflecting on the same point today in a post entitled A tragic Vindication and we need to accept that a very large swathe of the economics profession and Europe’s political elite are not only not amenable to reason but entirely to willing to dismiss tahe reality and the required solutions as out of touch with the accepted theories and the desired politics.

  8. Wonder what real austerity would feel like!

    Gross current expenditure was €52.5bn in 2007 and €60.5bn in 2012.

    Gross capital expenditure was €11.8bn in 2007 and is expected to be €10.4bn in 2012.

    The Dept of Finance said this year: “While taxation receipts in 2012 are projected to be just above 2004 levels, the gross voted expenditure of Government Departments and Offices in 2012, at an estimated €56bn, is projected to be 37% above the level it was in 2004, despite the very significant adjustments to both revenues and expenditure since mid-2008.”

  9. @Shay,
    In fairness I don’t believe John McHale is a taker for the expansionary fiscal contraction fairytale. He sometimes appears to be, perhaps because he’s Harvard-trained and also by nature something of a glass-is-half-full kind of person. If Krugman had written that “dispiriting” paragraph you quote it would go something like this:

    In the long run, the downward spiral with a shrinking economy and shrinking tax revenue will bring the economy to an Andrew-Mellon-style floor from which growth can resume with a balanced budget, but in the long run….

    It sounds less cheery than John McHale’s version but the meaning is much the same.

  10. MH,
    Down with that sort of thing. We do not need to know that “austerity” has not really been tried here. The national herd of well fed sacred cows has just had a slight clipping.

  11. @Brian Lucey
    Trying to figure out how to scan it to you…in the meantime here is another bit…

    Quote…” together with the significant deal which we reached on the Anglo promissory notes earlier this year, this is another step in restoring our economic fortunes”

  12. Can somebody explain how this headline makes any sense?

    http://www.rte.ie/news/2012/1009/tallaght-hospital-overdraft.html

    Ok – the exchequer funds hospitals. The hospital needs x million. The exchequer doesn’t want to pay just x million it wants to pay x million plus interest? Is that not just daft? Is it not another indirect bank bailout.

    I can make a tentative link back to the subject by saying this: there are so many dumb things that have been done and said over the past 4 years. IMF just one of many illogical strategies

  13. @ All

    FYI

    http://www.businessweek.com/news/2012-10-09/schaeuble-calls-debate-on-legacy-assets-a-phantom

    Maybe the Irish media should spend more time at the press conferences given by Herr Schaeuble. This is, however, unlikely as thye are under constant pressure from their editors to attend those given by their own ministers – a common phenomenon – to try and get news on whatever the domestic crisis of the days is.

    As to getting policy-makers to listen, maybe the question shoud be put the other way around. The figures quoted by MH can only lead to the conclusion that Ireland is following a counter-cyclical economic policy.

    On the debate with regard to Greece on the other thread, it strikes me that what is missing is any recognition of the political negotiating dynamics involved. A game of double-bluff is being played out between Berlin and Athens as to what each really thinks of the impact of a Greek euro exit for their respective countries. The tide of battle swings to and fro and is currently in Greece’s favour. The real measure is the extent to which Greece is making the necessary reforms on the ground including the basic task of actually collecting enough taxes to fund the government. It seems that it is close to doing the latter, excluding interest payments.

    In Ireland’s case, the country’s strongest card is that it has a public service that is actually capable of delivering on the targets set. But the absolute priority remains to get down the deficit and as fast a clip as possible.

    While it is probably controversial to say so, the “permanent government” is back in its rightful position under the Constitution – with the backing of the Troika – especially as evidenced by the attention now being paid to comments from official expert sources, notably the Central Bank.

    As to the role of the Dáil, by all means, let it play the role it should! But for this to happen, the necessary changes in legislation must be introduced and public servants cannot be held to be at fault if they are not.

  14. @ DOCM

    It is undeniable, however you may try to dispute that Ireland is in the grip of Austerity hysteria (Naomi Klein may have some insight on the real reason for the perennial popularity of this fictitious ‘cure’) that Greece is certainly doing so. Tell me, just how is that working out for the Greeks?

    @ Shay Beggorah

    I think the Confidence Fairy is a known associate of the “wealth creator”. I see a specimen of the latter species, a French car salesman, bit the dust today.

  15. @ EWI

    You are probably right on the first point. Despite the facts and figures staring them in the face, numerous commentators on this blog, and elsewhere, continue to insist that the country is undergoing a draconian austerity cure.

    It may, of course, be finally about to arrive cf.

    http://www.irishtimes.com/newspaper/ireland/2012/1010/1224325096470.html?via=rel

    On your question, the answer is, of course, badly. But the crisis in Greece, as the IT’s excellent Athens correspondent has repeatedly pointed out, has been decades in the making and will take decades to fix. The timescale for Ireland should be shorter. While Greeks have reputedly shifted over 200 billion euros to safer locations, cash buyers accounted for one billion of property purchases in Ireland! The other fact staring the population in the face but which it seems psychologically incapable of even recognising; that there are winners and losers when a bubble eventually collapses, admittedly more of the latter than the former.

  16. Thursday, October 11, 2012
    IMF Suddenly Decides It Might be OK to Loosen Austerity Tourniquets Now that Gangrene is Setting In

    While deathbed conversions might earn you a spot in heaven in some religions, they don’t carry you very far here on Planet Earth.

    Christine Lagrade has taken too small a step in the right direction far too late to do much good. At the current IMF annual meeting in Tokyo, she’s made dramatic-sounding pronouncements consistent with the rather embarrassing admission in the Fund’s latest quarterly report that austerity is working less well than voodoo (I’ve never tried it myself, but some correspondents give it high marks).

    As we stressed, the IMF has admitted what observers have already reported on, at some length, by looking at economic outcomes in Latvia, Greece, Ireland, Portugal, and Spain: its tender ministrations are leaving its patient worse off. Cuts in fiscal deficits (ex in special circumstances, such as being able to trash your currency at a time when your trade partners have good levels of growth) lead to even greater falls in GDP levels, resulting in higher debt to GDP ratios, the exact opposite of what this exercise was intended to accomplish. The bureaucratese is “fiscal multipliers.” When fiscal multipliers are greater than 1 deficit cutting makes matters worse. The IMF’s ‘fessing up to a problem without releasing country by country data suggests it is showing fiscal multiplies greater than 1 in pretty much all of the countries now wearing the austerity hairshirt.

    http://www.nakedcapitalism.com/2012/10/imf-suddenly-decides-it-might-be-ok-to-loosen-austerity-tourniquets-now-that-gangrene-is-setting-in.html

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