The IMF as a transmission mechanism for academic knowledge

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In my recent post on the ‘biggest policy mistake of the last decade’, I emphasised the irrelevance of the academic consensus on austerity if politicians did not want to listen. It was, inevitably, a picture painted with a broad brush.

I did not discuss, for example, an element that should form part of the transmission mechanism for academic knowledge but didn’t, and that is European central banks. As I have discussed here, these central banks are full of economists applying state of the art macroeconomic knowledge, so they should be a source for the current academic consensus. But these central banks are also very hierarchical, and if the senior staff want to give out a different message they can. In Europe that message was that austerity was necessary, and worse still that the lower bound for interest rates was no impediment to their ability to control the economy.

This was a serious mistake for two reasons. First, central bank leaders were going against the knowledge that their own economic models and analysis gave them. Second, their implication that the lower bound for interest rates didn’t matter was not only very wrong but also encouraged politicians to continue with austerity.

But there was a perhaps surprising route by which the academic consensus did get through, and that was the International Monetary Fund. The IMF itself wavered on austerity. At first (before 2010) it encouraged coordinated fiscal stimulus. As the Eurozone crisis began to unfold it changed its mind, and advocated austerity. But this did not last that long. I remember visiting the IMF in September 2012, and being told of empirical workby their Chief Economist Olivier Blanchard and Daniel Leigh that suggested multipliers might be much larger than the received Fund wisdom at the time. It was nice for me, because one of the talks I gave was why from a theoretical point of view multipliers might be large when interest rates were stuck at their lower bound.

This was not the only piece of Fund work that undermined the case for austerity. Thisanalysis questioned the empirical case for expansionary austerity, as I discussed here. Economists at the IMF also showedclearly how unusual the behaviour of government spending after the Global Financial Crisis was compared to previous recoveries: austerity, far from being the norm, was an untried experiment. Indeed I think it is fair to say that if you wanted a source of empirical analysis on the impact of austerity, the IMF was your first port of call.

As Ben Clift discusses here, the IMF have also pioneered analysis of how inequality, and perhaps even large financial sectors, may be bad for growth, and much more that you would not have expected from the IMF of the last century. But he also points out something I emphasised in a postI wrote after my visit. The IMF is extremely heterogeneous. Alongside more modern views of the role of fiscal policy you will also find traditional fiscal hawks. The IMF also has its hierarchy with more political masters, but the difference is that at the IMF today there is no rigid control of what gets published by its economists.

For example, the IMF have an Independent Evaluations Office, which appears to be lead by economics rather than politics and which is often critical of IMF practice. I noted here, for example, a 2014 analysis of austerity, which criticised the support the IMF gave to austerity from 2010. The report essentially suggested that parts of the IMF had been panicked by the Eurozone crisis, which also presumably gave the fiscal hawks in the institution the upper hand. The report also explains why this panic was unwarranted given what we now understand about the Eurozone specific causes of that crisis, and this together with the Blanchard and Leigh analysis helped turn the tide against a belief in the virtues of austerity in the IMF.

All this IMF work was clearly very helpful to those economists like myself who were arguing against austerity at the time. It didn’t change policies in the UK and among Republicans in the US because those policies were ideologically based. I doubt it had much impact in Germany either. However it might be possible to argue it had some influence in softening the line taken by the EU Commission. If you look at the OECD’s estimate of underlying primary balances, 2013 was the last year of fiscal contraction in the EU as a whole.

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