»Strenge Sparpolitik steht in Zusammenhang mit geringerem Wachstum«

I. Introduction

With many economies in fiscal consolidation mode, there has been an intense debate about the size of fiscal multipliers. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. A natural question therefore is whether forecasters have underestimated fiscal multipliers, that is, the short-term effects of government spending cuts or ta x hikes on economic activity. 

In a box published in the October 2012 World Economic Outlook (WEO; IMF, 2012b), we focused on this issue by regressing the forecast error for real GDP growth on forecasts of fiscal consolidation. Under rational expectations, and assuming that forecasters used the correct model for forecasting, the coefficient on the fiscal consolidation forecast should be zero. If, on the other hand, forecasters underestimated fiscal multipliers, there should be a negative relation between fiscal consolidation forecasts and subsequent growth forecast errors. In other words, in the latter case, growth disappointments should be larger in economies that planned greater fiscal cutbacks. This is what we found. 

In the box published in October, we focused primarily on forecasts made for European economies in early 2010. The reason was simple: A number of large multiyear fiscal consolidation plans were announced then, particularly in Europe, and conditions for larger- than-normal multipliers were ripe. 

First, because of the binding zero lower bound on nominal interest rates, central banks could not cut interest rates to offset the negative short-term effects of a fiscal consolidation on economic activity. Christiano, Eichenbaum, and Rebelo (2011) have shown, using a dynamic stochastic general equilibrium (DSGE) model, that under such conditions, fiscal multipliers can exceed 3.[1] Since episodes characterized by a binding zero lower bound (also referred to as “liquidity trap” episodes) have been rare, only a few empirical studies investigate fiscal multipliers under such conditions. Based on data for 27 economies during the 1930s—a 4 year period during which interest rates were at or near the zero lower bound—Almunia and others (2010) have concluded that fiscal multipliers were about 1.6.[2]

Second, lower output and lower income, together with a poorly functioning financial system, imply that consumption may have depended more on current than on future income, and that investment may have depended more on current than on future prof its, with both effects leading to larger multipliers (Eggertsson and Krugman, 2012).[3]

Third, and consistent with some of the above mechanisms, a number of empirical studies have found that fiscal multipliers are likely to be larger when there is a great deal of slack in the economy. Based on U.S. data, Auerbach and Gorodnichenko (2012b) have found that fiscal multipliers associated with government spending can fluctuate from being near zero in normal times to about 2.5 during recessions.[4]  If fiscal multipliers were larger than normal and growth projections implicitly assumed multipliers more consistent with normal times, then growth forecast errors should be systematically correlated with fiscal consolidation forecasts. 

Our October 2012 box generated many comments, criticisms, and suggestions. In this paper, we restate our methodology, revisit our results, examine their robustness, and consider a number of extensions. 

Section II presents our estimation approach and reports our baseline results. Our forecast data come from the spring 2010 IMF World Economic Outlook (IMF, 2010c), which includes forecasts of growth and fiscal consolidation—measured by the change in the structural fiscal balance—for 26 European economies. We find that a 1 percentage point of GDP rise in the fiscal consolidation forecast for 2010-11 was associated with a real GDP loss during 2010-11 of about 1 percent, relative to forecast. Figure 1 illustrates this result using a scatter plot. A natural interpretation of this finding is that multipliers implicit in the forecasts were, on average, too low by about 1. 

In Section III, we investigate the robustness of the baseline result along three dimensions. 

First, we consider the sensitivity of the base line results to outliers and to the choice of economies in the sample. Robustness checks indicate an unexpected output loss, relative to 5 forecast, that is for the most part near 1 percent and typically above 0.7 percent, for each 1 percent of GDP fiscal consolidation. We obtain similar results when we extend the analysis to forecasts for all advanced economies. However, and not surprisingly given their different economic circumstances, we find no evidence of multipliers being over- or under-estimated for emerging market economies during that period. 

Second, we reestimate our baseline specification while adding control variables, ranging from initial fiscal and current account balances to initial bank credit risk and household debt levels. These could plausibly have both affected the growth forecast error and been correlated with fiscal consolidation forecasts. Not controlling for such factors could influence the estimated relation between fiscal consolidation forecasts and growth forecast errors. We find, however, that our results are robust to the introduction of such controls. 

Third, we look at the results for other time intervals since the start of the crisis, as well as the results for “normal times” (1997–2008). Looking within the crisis, we find evidence of more underestimation of fiscal multipliers earlier in the crisis (for the time intervals 2009–10 and 2010–11) than later in the crisis (2011–12 and 2012–13). Results for the earlier samples yield coefficients typically between 0.7 and 1.0. Result s for the later samples yield coefficients typically between 0.3 and 0.5 and are less statistically significant. Interestingly, and again perhaps not surprisingly, we find no evidence of systematic forecast errors related to planned changes in fiscal policy during the precrisis decade (1997–2008). 

Having discussed robustness, Section IV turns to three extensions of our baseline results. 

First, we check whether the baseline results differ depending on whether the fiscal consolidation reflects changes in government spending or changes in revenue. The results suggest that fiscal multipliers were, on average, underestimated for both sides of the fiscal balance, with a slightly larger degree of underestimation associated with changes in government spending. 

Second, we examine forecast errors for the unemployment rate and for the components of GDP. We find that forecasters significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation. 

Finally, we compare the baseline results obtained using IMF forecast errors with those obtained using the forecast errors of other forecasters, including the European Commission (EC), the Organization for Economic Cooperation and Development (OECD), and the Economist Intelligence Unit (EIU). Here, we find that the results hold for all the forecasters considered, with coefficients ranging from –1.1 to –0.4. The results are strongest, in terms of both economic and statistical significance, for forecasts published by the IMF and, to a slightly lesser extent, by the EC. 6 

We conclude in Section V with a discussion of what our results do and do not imply for actual multipliers. We conclude that multipliers we re substantially above 1 in the early years of the crisis. The lower coefficients in recent years may reflect in part learning by forecasters and in part smaller actual multipliers than in the early years of the crisis. We end with a number of caveats. 

First, forecasters do not typically use explicit multipliers, but instead use models in which the actual multipliers depend on the type of fiscal adjustment and on other economic conditions. Thus, we can only guess what the assumed multipliers, and by implication the actual multipliers, have been during the crisis. 

Second, our results only give average multipliers for groups of countries, and individual countries may well have larger or smaller multipliers than the average. 

Third, our findings that short-term fiscal multipliers have been larger than expected do not have mechanical implications for the conduct of fiscal policy. Some commentators interpreted our earlier box as implying that fiscal consolidation should be avoided altogether. This does not follow from our analysis. The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single economy.  

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