Wednesday, 6 October 2010

Behind a bland title a reason to be concerned.

When the boffins from the International Monetary Fund reckon the fiscal conservatives are wrong we really do have reason to worry.
Hidden behind the somewhat bland title “Will it hurt? Macroeconomic effects of fiscal consolidation” released overnight by the IMF revealed some gloomy predictions of what will follow from the worldwide rush to reduce government budget deficits.
The report says:
Our findings suggest that in today’s environment, fiscal consolidation is likely to have more negative short term effects than usual. In many economies, central banks can only provide a limited monetary stimulus because interest rates are already near zero.
Moreover, if many countries adjust simultaneously, the output costs are likely to be greater — since not all countries can reduce the value of their currency and increase net exports at the same time.
Our simulations suggest that the contraction in output may be more than twice as large as our baseline estimate when central banks cannot cut interest rates, and when the adjustment is synchronized across all countries. But for economies considered at high risk of sovereign default, short-term negative effects are likely to be smaller.”
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