Sentences to ponder (the IMF on fiscal policy and multipliers)

by on October 12, 2012 at 6:34 pm in Economics | Permalink

For the countries where the full data is available on the IMF website, the results lose statistical significance if Greece and Germany are excluded.

Moreover, the IMF results are presented as general but are limited to the specific time period chosen. The 2010 forecasts of deficits are not good predictors of errors in growth forecasts for 2010 or 2011 when the years are analysed individually. Its 2011 forecasts are not good predictors of anything.

Economists contacted by the FT worried about the robustness of the techniques used. Jonathan Portes, director of the UK’s National Institute of Economic and Social Research, worried that cross-country studies with small samples never prove anything, even though he strongly believes multipliers are large.

I suspect that FT blog post is not one which will be shouted by many from the rooftops.  Multiple hat tips are expressed here.

1 david October 12, 2012 at 8:24 pm

Consistency does demand applying these standards of empirical rigor regardless of the argument being made – whether the fiscal policy is argued to be large or argued to be negative (i.e., expansionary fiscal contraction). I hope this gets shouted from the rooftops, but I suspect it won’t, too.

2 Mike October 13, 2012 at 6:45 am

Cutting spending has the built in advantage of being cheaper, so it shouldn’t need nearly as much proof as the idea that going into debt will magically (I know, “animal spirits”) make us richer.

3 Alex Godofsky October 12, 2012 at 9:11 pm

For the countries where the full data is available on the IMF website, the results lose statistical significance if Greece and Germany are excluded.

This is a mockery of statistical significance. There is essentially 0 epistemic value here. Why are you even posting this?

4 Meegs October 12, 2012 at 10:03 pm

The fiscal multiplier is the biggest zombie lie in existence.

5 Claudia October 12, 2012 at 10:04 pm

And we get scolded for poor reading comprehension?

FT blog says “IMF results are presented as general but are limited to the specific time period chosen”

IMF box says “The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach.”

It’s the whole freaking point of the box that the multiplier might be different in the current economic conditions. I won’t argue with standard concerns about robustness (the Germany-Greece gripe is silly), proper inference, and generalizability…but the IMF box is much more worth your reading time than the FT blog piece.

6 DocMerlin October 13, 2012 at 1:24 am

Multiplier of 0.4? So government spending increase causing a net decrease in consumption?

7 TMC October 13, 2012 at 9:45 am

The quote says ‘too low by .4 …’ (as I know you understood), but I would agree that it is <1.

8 Claudia October 13, 2012 at 11:12 am

Doc, does it say “of 0.4”? No! It says “by 0.4”

The next sentence in the intro was “Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.”

I am not endorsing the findings, but would recommend reading the box [PDF] http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf On printed page number 41, electronic page 61.

And footnote 6 leads to a useful 2010 IMF chapter on fiscal consolidation http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf with this quote: “Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point. Domestic demand—consumption and investment—falls by about 1 percent.” Note this is the result being rexamined in the new box.

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