Fiscal Policy’s Evolving Role

Fiscal policy makers have faced an extraordinarily challenging environment over the last few years. At the outset of the global financial crisis, the IMF for the first time advocated a fiscal expansion across all countries able to afford it, a seeming departure from the long-held consensus among economists that monetary policy rather than fiscal policy was the appropriate response to fluctuations in economic activity. Since then, the IMF has emphasized that the speed of fiscal adjustment should be determined by the specific circumstances in each country. Its recommendation that in general deficit reduction proceed steadily, but gradually, positions the IMF between the fiscal doves (who argue for postponing fiscal adjustment altogether) and the fiscal hawks (who argue for a front-loaded adjustment).

All this is highlighted in a  recently released book Post-Crisis Fiscal Policy, edited by Carlo Cottarelli, Philip Gerson and Abdelhak Senhadji,  that brings together the analysis underpinning the IMF’s position on the evolving role of fiscal policy.  The book underscores how the global financial crisis has reshaped our understanding of the role of fiscal policy with topics that include a historical view of debt accumulation; the timing, size, and composition of fiscal stimulus packages in advanced and emerging economies; the heated debate surrounding the size of fiscal multipliers and the effectiveness of fiscal policy as a countercyclical tool and more.

Check out this book, which is written for a wide audience, and watch the webcast of the book launch hosted by the Peterson Institute for International Economics on July 14 .

Fiscal Policy in Latin America: Prudence Today Means Prosperity Tomorrow

Alejandro WernerBy Alejandro Werner

(Versions Español and Português)

Public finances in most Latin American countries strengthened significantly before the global financial crisis. Since 2009, countries have generally increased public deficits, drawing down on their fiscal coffers.

These expansionary policies continue and are yet to be reversed. With further pressures likely to build over the period ahead—as economic growth has slowed, commodity prices have softened, and external funding costs are bound to rise—now is the right time to rethink fiscal policies across the region.

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Global Recovery Strengthens, Tensions Heighten

The world economic recovery is gaining strength, but it remains unbalanced. Earlier fears of a double dip recession—which we did not share—have not materialized. And, although rising commodity prices conjure the specter of 1970s-style stagflation, they appear unlikely to derail the recovery. However, the unbalanced recovery confronts policy makers with difficult choices. In most advanced economies, output is still far below potential. Low growth implies that unemployment will remain high for many years to come. And the problems in Europe’s periphery are particularly acute. On the other end of the spectrum, emerging market countries must avoid overheating in the face of closing output gaps and higher capital flows. The need for careful design of macroeconomic policies at the national level, and coordination at the global level, may be as important today as they were at the peak of the crisis two years ago.

The Long and the Short of It—Government Debt Plans in 2011 and Beyond

Fiscal policy this year in some leading advanced economies is shaping up to be quite different from what was expected just last November, according to the just-published Fiscal Monitor update. Some of this change is attributable to the somewhat better than projected fiscal results in 2010. Most of it, however, is due to additional stimulus measures introduced in recent months. Altogether, sovereign risks remain elevated and in some cases have increased since November 2010. No amount of deficit reduction this year, however, can be sufficient to restore countries’ fiscal accounts to robust good health. Putting the government accounts in order will require a multi-year effort. So, how are countries doing in setting out their longer-term plans? Here, we see somewhat of a mixed picture.

Two-speed Global Recovery Continues

The world economic recovery continues. Although global growth is set to slow over the coming year, underlying private demand is improving and we expect the slowdown to be modest. Global growth should remain at 4.4 percent in 2011, down from 5 percent in 2010. But it remains a two-speed recovery: slow in advanced countries, and much faster in emerging and developing economies. As a result, tensions and risks are emerging, which require strong policy responses. In this post, Olivier Blanchard discusses the IMF’s update of the world economic outlook, including the short-term tensions and risks, and what needs to be done, to reduce risks and strengthen the global recovery.

Exploring Economic Policy Frontiers After the Crisis: 2010 IMF Research Conference

The crisis has forced economists and policy makers to go back to their drawing boards. Where did they go wrong, and what implications does the crisis have for both macroeconomic theory and macroeconomic policy making? This was the topic of this year’s IMF Jacques Polak Research Conference. The twelve papers presented at the conference provided rich fodder for discussion. Here, Olivier Blanchard shares some flavor of the major themes, including: (i) the increased attention to fiscal policy; (ii) the scope for monetary policy to lessen the adverse ‘real economy’ effects of financial disruptions; (iii) the role of international capital flows in weakening financial stability; and (iv) the prominence of regulatory issues and the interplay with the real economy.

The Two Rebalancing Acts

Achieving a “strong, balanced, and sustained world recovery”—to quote from the goal set in Pittsburgh by the G-20—was never going to be easy. It requires much more than just going back to business as usual. It requires two fundamental and complex economic rebalancing acts: internal and external rebalancing. These two rebalancing acts are taking place too slowly. As the latest World Economic Outlook reveals, the result is a recovery which is neither strong, nor balanced, and runs the risk of not being sustained.

IMF Annual Meetings – Key reports out

The IMF has just published its latest forecast for the global economy, the World Economic Outlook. After a deep recession, global economic growth has turned positive, driven by wide-ranging, coordinated public intervention that has supported demand and reduced uncertainty and systemic risk in financial markets, according to the report.

"The recovery has started. Financial markets are healing," says IMF Chief Economist Olivier Blanchard. But he warned the recovery will be slow. "The current numbers shuld not fool governments into thinking that the crisis is over," he said.

The Fund also published its Global Financial Stability Report.  It also sees a recovery, but much more needs to be done to heal the international financial  system, including repairing bank balance sheets. Read the IMF Survey story.

[youtube=http://www.youtube.com/watch?v=XPYtbOt8Oqg]

 

By | October 1st, 2009|Economic Crisis, Financial Crisis, IMF|1 Comment
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