The multiplier and the rate of return on aid
Critics of “austerity” are often weak or a bit mumbly on what is the relevant alternative or counterfactual. When it comes to the U.S., the relevant alternative is borrowing more, but in many cases, such as in the European periphery, the alternative is/was more aid.
So, in these cases, a multiplier of one means that a dollar of aid — the alternative to the fiscal consolidation — is worth a dollar. I find that easy to believe. It’s not really a claim about fiscal policy or Keynesian economics.
A multiplier of 1.4 means that a dollar of aid brings $1.40 in benefits. Imagine receiving aid, and not just benefiting from the dollar, but avoiding a fire sale of your assets or investing the money wisely or maybe just avoiding a civil collapse. That’s more of a stretch, but also not outside the realm of the possible.
As the IMF becomes more critical of austerity, the IMF therefore should believe in higher rates of return to aid. But does it?
@Yannikouts nailed it here:
It’s one thing IMF economists to argue for softer austerity and a totally other thing to convince IMF Board members to commit to extra funds
Few people believe in austerity when it is someone else’s money on the line. Here is my earlier post How emigrants try to run their fiscal policies.