Ajai Chopra on the fiscal multiplier in Ireland

This post was written by Philip Lane

The following statement by Ajai Chopra, Deputy Director in the European Department of the International Monetary Fund (IMF) is issued in response to media queries regarding the recently published research in the IMF’s World Economic Outlook on the impact of fiscal adjustment on economic growth and its implications for the EU-IMF supported program in Ireland:

“Putting public finances on a sound footing and promoting a durable economic recovery are both imperative for Ireland’s future. To contain the impact of fiscal consolidation on growth, adjustment has been— from the start of Ireland’s EU/IMF-supported program—phased over several years. The composition of budget measures is determined by the government, with the IMF, together with the EC and ECB, emphasizing the importance of implementing high quality measures that are as growth friendly as possible.
“In the current discussion of the impact of fiscal adjustment on growth, it is important to note that no single fiscal multiplier is applicable to all countries and circumstances. And although there is uncertainty around any estimate of multipliers, there is no compelling evidence that a higher multiplier was at work in Ireland than the one assumed under the program.  With overburdened bank, household and SME balance sheets, and weak growth in trading partners, a number of factors besides fiscal consolidation have been a drag on growth in Ireland.

“The pace of consolidation under the program has struck an appropriate balance and continues to do so for the period ahead, enabling Ireland to make steady progress in reducing fiscal imbalances while protecting the still fragile economic recovery.”

22 Responses to “Ajai Chopra on the fiscal multiplier in Ireland”

  1. Tom Healy Says:

    We can all agree that fiscal multipliers are not negligible in Ireland - Small Open Economy concerns notwithstanding. Are fiscal multipliers here such that spending cuts are more efficient than revenue increases? And what are the consequences of a given spending cut in a particular part of overall spending. Research in this area is limited. The ESRI produced some good working papers in 2009 and 2010 (Recovery Scenarios). Recently, NERI staff have presented a paper at the Dublin Economics Workshop. The paper which is undergoing revision is available at http://www.nerinstitute.net/download/pdf/alternative_fiscal_pathways_dew_.pdf

  2. Seamus Coffey Says:

    And much the same statement was also issued by Ajai Chopra’s equivalent in Portugal.

    http://www.imf.org/external/country/prt/rr/2012/101712.pdf

  3. John Foody Says:

    So is the IMF position that on a Europe wide basis the multipler is too high, but in each of those countries with no choice but to implement austerity, it’s not? If so, politically convenient, no?

  4. Shay Begorrah Says:

    @John Foody Says:

    So is the IMF position that on a Europe wide basis the multipler is too high, but in each of those countries with no choice but to implement austerity, it’s not?

    Perfect. Though austerity is counter productive from a national economic point of view it should still be imposed as that suits the broader political consensus among the dominant creditor states and institutions.

    You would imagine that the sleeping pill/alcohol consumption of those being required to spin austerity is on an upwards trend.

  5. PR Guy Says:

    @Shay Begorrah

    “You would imagine that the sleeping pill/alcohol consumption of those being required to spin austerity is on an upwards trend.”

    Hmmmm. I suspect the alcohol consumption was already red-lining and no PR Guy (or Gal) loses sleep. He (or she) simply articulates what it is his (or her) clients …….

    I’ll get my coat.

  6. David O'Donnell Says:

    @Ajai

    Blind Biddy says: Hi!

  7. John Corcoran Says:

    I hope the comedians are as funny as the economists.

  8. DOCM Says:

    @ John Corcoran

    Or the politicians!

    http://www.telegraph.co.uk/finance/financialcrisis/9626049/David-Cameron-to-Angela-Merkel-Ill-stick-to-my-guns-on-EU-budget.html

  9. John Foody Says:

    Has anyone read this IMF working paper on issuing debt free money. Has a ‘cult following’ according to the Telegraph.

    http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

  10. Paul Ferguson Says:

    @ John Foody

    Thanks for the link John. I’m obviously very familiar with ‘The Chicago Plan Revisited’ and I thought it was great to see yet another article by a mainstream media suggesting the fault lies with how money is created.

    The article you refer to can be viewed at;
    http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html

    We’re all very excited in the monetary reform circles too about Positive Money being broadcast on national British radio too. Ben Dyson will be speaking at 20:45pm on Wednesday about full reserve banking as a solution to the crisis.

  11. DOCM Says:

    Off topic but of great significance to Ireland’s economic prospects.

    http://www.ft.com/intl/cms/s/0/9370d7ec-1c4b-11e2-a14a-00144feabdc0.html#axzz2A0tobgC0

    http://www.ft.com/intl/cms/s/0/9552bb2e-1c65-11e2-a63b-00144feabdc0.html#axzz2A0tobgC0

    Can any of the leaders of the EU, inadequate as they are, afford to walk away from a budget deal in November in the present fraught circumstances?

    Cameron, for one, is being invited by the FT not to shoot himself in the foot a second time.

  12. michael burke Says:

    Neither the IMF’s research nor previous analysis by Martin Wolf suggests that Ireland is an outlier in their findings (Wolf’s point estimate is a multiplier of 1.5 versus 0.9-1.7 for the IMF).

    Once even a small adjustment is made for the inflation of Irish GDP by the activities of MNCs, then it conforms entirely to average.

    But if, according to Ajai Chopra and the supporters of Troika policies, there is ‘no evidence’ that mulipliers are higher than assumed in their models, why has the current buget deficit not decreased at all?

    Further, why is fiscal tightening set to be harsher here than anywhere else in the Euro Area in the period 2012-2015?

  13. Shay Begorrah Says:

    @michael burke

    Neither the IMF’s research nor previous analysis by Martin Wolf suggests that Ireland is an outlier in their findings (Wolf’s point estimate is a multiplier of 1.5 versus 0.9-1.7 for the IMF).

    I sometimes wonder whether some of this blogs primary contributors become suddenly busy with other pressing matters when the stubborn refusal of the facts to fit the theories (the “standard analysis” even) is raised.

    I know that these are clever, well educated men but there is something disconcertingly religious about the desire to hew to the very same set of economic assumptions that applied before the crash of 2008.

    Strong determination, structural reforms, market liberalization, fiscal rules, difficult decisions - mein Fuhrer - I can walk!

  14. Brian Woods Snr Says:

    @ SB: “I know that these are clever, well educated men but there is something disconcertingly religious about the desire to hew to the very same set of economic assumptions that applied before the crash of 2008.”

    Shamens, Fakirs, Charlatans and failed Astrologers would be more apt; (vide: Galbraith pere). If they were experimental scientists they would be ridiculed as incompetents.

  15. Shay Begorrah Says:

    @Brian Woods Snr

    Shamens, Fakirs, Charlatans and failed Astrologers would be more apt;

    I used to like the astrology/economics comparison (standard Astrological analysis shows, Efficient Horoscopes Theory, it writes itself.) but Astrologists are generally not right wing blowhards with an extreme political agenda and worrying signs of sociopathic tendencies who have spent the last thirty years unironically extolling the benefits of market discipline as we sailed through bubble after bubble that had to be cleaned up at public expense.

  16. Brian Woods Snr Says:

    @ SB: Agreed!

  17. John Foody Says:

    @ Paul Ferguson

    They make quit a case! It’s a great read. Is it not possible that over time the state would get nearly (cos you could never be) as bad as the banks? I.e What’s your take on how the power could be abused by the state and how to prevent such abuse?

  18. David O'Donnell Says:

    fyi

    • Ireland has won support from the eurozone’s two most powerful leaders over its calls for a new deal on its legacy banking debts. French president François Hollande said he believes Irish banks should be retrospectively recapitalised (see 15.08 onwards). The comments came hours after Dublin and Berlin issued a joint statement saying Ireland deserves ’special treatment’ (see 8.12am onwards)

    http://www.guardian.co.uk/business/2012/oct/22/eurozone-crisis-ireland-merkel-cameron-veto

    Do it.

  19. seafóid Says:

    Sonderfall Irland

    I wonder how much it will be worth in the end. Talk about being strung along.

  20. David O'Donnell Says:

    Press Release: Statement by the EC, ECB, and IMF on the Review Mission to Ireland

    http://www.imf.org/external/np/sec/pr/2012/pr12398.htm

  21. Tom Healy Says:

    could someone, anywhere, somehow point me to the exact page, table, working paper where the regression analysis shows that Ireland was an exception to the general tendency for IMF to under-estimate fiscal multipliers over recent years? how can we test such a claim without knowing the underlying data?

  22. Tom Healy Says:

    The key chart is here http://www.imf.org/external/pubs/ft/weo/2012/02/c1/boxfig1_1_1.pdf
    and data
    http://www.imf.org/external/pubs/ft/weo/2012/02/c1/boxfig1_1_1.csv

    and full text
    http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/c1.pdf

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