{"id":810,"date":"2013-02-18T08:54:22","date_gmt":"2013-02-18T08:54:22","guid":{"rendered":"https:\/\/karlwhelan.com\/staging\/?p=810"},"modified":"2014-08-05T21:40:38","modified_gmt":"2014-08-05T21:40:38","slug":"ollis-follies-is-debate-about-fiscal-multipliers-unhelpful","status":"publish","type":"post","link":"https:\/\/www.karlwhelan.com\/ollis-follies-is-debate-about-fiscal-multipliers-unhelpful\/","title":{"rendered":"Olli’s Follies: Is Debate About Fiscal Multipliers Unhelpful?"},"content":{"rendered":"

Olli Rehn is the European Commissioner for economics.\u00a0 Olli has spent much of his time in recent years telling everyone that\u00a0Europe<\/span>\u2019s austerity policies were working and the Eurozone economy was just about to turn the corner.\u00a0 In reality, the Eurozone has been\u00a0in recession<\/a>\u00a0since the third quarter of 2011 and the recession appears to be deepening: Eurostat this week\u00a0reported<\/a>\u00a0a decline of 0.6 percent in real GDP in the final quarter of 2012.<\/p>\n

<\/div>\n

This week, Olli sent a\u00a0letter<\/a>\u00a0to the EU\u2019s finance ministers and other luminaries including\u00a0IMF<\/span>\u00a0managing<\/span>\u00a0director\u00a0Christine Lagarde<\/span>.\u00a0 So what was on Olli\u2019s mind? Concern about the ongoing slump? Worries about record high\u00a0unemployment<\/a>?\u00a0 No. It turns out Olli is worried that\u00a0IMF<\/span>\u00a0economists are doing research on fiscal multipliers.<\/p>\n

Last year, IMF Chief economist Olivier Blanchard released a\u00a0paper<\/a>\u00a0co-authored with Daniel Leigh examining the impact of fiscal austerity (Full disclosure: Blanchard was my PhD supervisor).\u00a0 They compared the IMF\u2019s forecast errors for GDP growth in recent years with plans for fiscal consolidation.<\/p>\n

The paper found a negative relationship between fiscal consolidation and growth forecast errors and concluded that fiscal multipliers during the crisis must have been larger than had been assumed. In other words, austerity has had more negative effects than the IMF had previously assumed.<\/p>\n

Olli isn\u2019t happy that this research has been released. \u00a0His letter says that this debate<\/p>\n

has not been helpful and has risked to erode the confidence that we have painstakingly built up over the past years in numerous late-night meetings.<\/p><\/blockquote>\n

Even leaving aside the medieval prince aspects of these comments (\u201cGalileo needs to stop undermining confidence in the Ptolemaic system\u201d) can Olli really believe that\u00a0Europe<\/span>\u2019s finance ministers have been building up confidence while the economy languishes in recession?<\/p>\n

Olli\u2019s letter then launches into an amateur referee report on the Blanchard-Leigh paper.\u00a0 His first critique of their result is that the actual amount of fiscal consolidation was larger than planned, so the IMF paper is over-estimating fiscal multipliers. However, pages 13 and 14 of the paper contains a detailed discussion of this issue and concludes \u201con average, actual consolidation was neither smaller nor larger than expected.\u201d\u00a0 So, as far as I can tell, this issue was dealt with in the original analysis.<\/p>\n

Olli\u2019s second critique stems from the fact that the largest growth shortfalls occurred in 2010 when many countries were still implementing \u00a0temporary fiscal stimulus.\u00a0 He asserts (without providing any evidence) that permanent consolidation is associated with lower fiscal multipliers, suggesting that the kind of fiscal consolidation that occurred in Europe in 2011 and 2012 will not have contributed to unexpectedly low growth.\u00a0 But Figure 2 of the Blanchard-Leigh paper also shows strong negative relationships between fiscal consolidation and growth forecast errors for 2011 and 2012 so this point does not appear correct.<\/p>\n

In terms of who to believe here, you can choose to trust Olli the Confidence Man who believes debate about fiscal policy is unhelpful or the IMF’s chief economist who also happens to be the world\u2019s\u00a0tenth best<\/a>\u00a0economics researcher. I know who my money is on.<\/p>\n","protected":false},"excerpt":{"rendered":"

Olli Rehn is the European Commissioner for economics.\u00a0 Olli has spent much of his time in recent years telling everyone […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[31],"tags":[82,121,81],"class_list":["post-810","post","type-post","status-publish","format-standard","hentry","category-euro-crisis","tag-austerity","tag-fiscal-policy","tag-olli-rehn"],"_links":{"self":[{"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/posts\/810","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/comments?post=810"}],"version-history":[{"count":3,"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/posts\/810\/revisions"}],"predecessor-version":[{"id":1228,"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/posts\/810\/revisions\/1228"}],"wp:attachment":[{"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/media?parent=810"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/categories?post=810"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.karlwhelan.com\/wp-json\/wp\/v2\/tags?post=810"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}