Monday, October 15, 2012

IMF : "Sorry guys, our forecasting model about austerity was totally wrong"

In a technical analysis published in appendix of its World Economic Outlook, IMF states that austerity, notably in Eurozone (EZ), may not achieve its goal of reducing debt within a reasonable amount of time.
Why ?
Because  IMF economists realize now that standard fiscal multiplier of 0.5 used in forecasting models is largely underestimated for a time like this. This fiscal multiplier is used for assuming the consequence of a reduction of public deficit in term of GDP growth : a multiplier of 0.5 means that a reduction of 1% of public deficit leads to a GDP decrease of 0.5%.
IMF now estimates that the fiscal multiplier should be between 0.9 and 1.7, and in the case of EZ periphery, it should be near the upper end of this range.
As a result, austerity programs aiming to reduce the nominal deficit of indebted countries are plunging the EZ in a vicious circle that will lead to much more recession and finally to a disappointing debt reduction, if any.
Of course, IFM coming out is making waves among EZ policy makers : challenging the pro-austerity consensus is not helpfull, they say, given how hard it was to achieve in the first place.
We can expect them to hold on to austerity until the bitter end, but let us hope IMF challenge will help to shift the present pro-austerity consensus in the long run.