The Unassuming Economist

From the Washington Post:

The International Monetary Fund has a reputation, hard earned over the decades, of being the annoying friend who is always telling you to be more responsible. Eat more vegetables! Put in more hours at the office! Do you really need that second glass of wine?

Similarly, it has historically been the IMF’s role to tell countries to behave themselves economically: Cut those deficits! Let’s see some tighter monetary policy! Do you really need such a generous public welfare system?

But something strange has changed in the world economy, which is evident in the Fund’s latest edition of the World Economic Outlook. The IMF is now among the strongest voices against excessive fiscal austerity and tight money.

The Fund is most direct in its prescriptions for Britain, which has had a stagnant economy for the past three years as deficit-reduction has gone into effect. Sure, the language is that ofinternational bureaucratese (“In the United Kingdom, where recovery is weak owing to lackluster demand, consideration should be given to greater near-term flexibility in the fiscal adjustment.”). But there is no mistaking the message: Hey, David Cameron! Slow down with the deficit reduction! 

The Great Recession has been followed by the Not-So-Great Recovery. The IMF’s World Economic Outlook (WEO) shows that average incomes in advanced economies are rising, and are projected to rise, at a much slower rate than in past global recoveries. In contrast, incomes in emerging markets are growing at a much faster pace than during past recoveries—see chart 1. The WEO discusses several reasons for this divergence in fortunes. 

Caution about fiscal stimulus in advanced countries likely reflects the fact that they entered the Great Recession with much higher levels of debt than in the past—see Chart 3.

Box 1.1 does not get into an “an assessment of whether the different policy mix in this recession and recovery was appropriate. The response of policies may have been reasonable given the respective room available for fiscal and monetary policies in advanced economies. But there are also concerns. Even though monetary policy has been effective, policymakers had to resort to unconventional measures. Even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy. This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies. Four years into a weak recovery, policymakers may therefore need to worry about the risk of overburdening monetary policy because it is being relied on to deliver more than it has traditionally.”

Read Box 1.1 from the WEO here for the full analysis.

A new paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. The authors find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

The depth and breadth of the worldwide recession that followed the 2007–09 financial crisis have led to intensive discussions about the phases of the global business cycle—global recessions and global recoveries. The fragile nature of the ensuing global recovery has added a new twist to these discussions because of widespread concerns about the possibility of a double-dip global recession. This article provides brief answers to seven commonly asked questions about the global recessions and recoveries. Read more.

Herman Stekler has predicted 10 of the last 6 U.S. recessions. Despite this dismal forecasting performance, he is considered one of the giants of the economic forecasting profession. At the age of 80, he is still going strong, recently finishing his 100th academic paper. 

photo: IMF

A GW-IMF Forecasting Forum held on November 15-16, 2012 honored Stekler’s contributions to the profession. The program features papers by:

• Prakash Loungani on whether forecasters believe in Okun’s Law (they do); 
• Neil Ericsson on uncovering biases in government forecasts of U.S. debt; 
• Ulrich Frtische on whether there is (lack of) herding in foreign exchange rate forecasts; 
• Michael Kumhof on what will happen to the price of oil in ten years (warning: this is not the official IMF view); 
• Natalia Tamirisa on information rigidity in growth forecasts; 
• Massimiliano Marcellino on whether the estimation of large Bayesian VARs can be speeded up by assuming a common stochastic volatility factor. 

The papers can be downloaded from here along with the comments of the stellar group of discussants (Kajal Lahiri, Tara Sinclair, Ed Gamber, Danny Bachman, Robert Fildes, Jonas Dovern, Olivier Coibion, Andy Levin, Fred Joutz, Chris Erceg, Keith Ord and Xuguang Sheng).

The forecasters attending the forum had been asked to predict the outcome of the U.S. Presidential election. Peg Young came the closest, predicting that Obama would win 50.5% of the popular vote (he got 50.6%) and 326 votes in the electoral college (he got 332).

photo: IMF