The IMF's chief economist and a colleague published a 3 page note in October about mistaken notions about the size of the fiscal multiplier. They then released a longer paper in early January. One comment about the this work (which pretty much sums up all the comments) was:
Nothing in economics is more potent than a simple idea whose time has
come. Illustrating this maxim, a three-page article in the IMF’s latest
World Economic Outlook
promises to have a greater effect on global economic policy than all of
the interminable meetings held at the annual meetings of the IMF and
the World Bank in Tokyo a week ago.
That article, written by IMF chief economist Olivier Blanchard and
Daniel Leigh, presented evidence that the fiscal multiplier [1] in the
advanced economies is considerably larger than had been assumed when
fiscal austerity plans were set in train in most economies in 2010. The
implication, if they are right, is that austerity is much more damging
to output in the near term than was anticipated. As a result, the
planned fiscal retrenchment could be hard to sustain in the next few
years, not only in the eurozone but in the US and UK as well. In fact,
we are already seeing signs of this in peripheral Europe and the UK.
(see link here)
You can find the longer paper here if you are interested.
"Nothing in economics is more potent than a simple idea whose time has come," powerful indeed! It just takes me back to Quiggin's Zombie economics. Could this come back as Zombie? Guess not but it just shows how easily concepts in economics can mislead us when we dont know much about them.
ReplyDeleteInteresting idea that the cumulative effect of Austerity, is the multiplier effect in reverse. While austerity seems like a relatively straight-forward cost cutting mechanism, its dangerous ramifications have been perfectly illustrated in the past couple years.
ReplyDeleteAusterity, while at its core is a simple budgetary cut, also has had dramatic effects on consumer/investor sentiments in these countries. As we've seen in class, the other variables within the functions for consumption and investment--are overruled when doubts about the overarching macro-outlook run high.