This week the International Monetary Fund argued that Keynesian short-term multipliers used in economic forecasts had been “systematically too low since the start of the Great Recession”.
The multiplier describes the relationship between changes in taxation or public spending and output. For a multiplier of 1, a $1 increase in taxation will reduce GDP by $1. For a multiplier of 0.5, a $1 reduction in spending will reduce GDP by $0.50. The higher the multiplier, the more painful deficit reduction.
The IMF justified its concern over multipliers by evaluating its April 2010 forecasts for growth. It found that in countries that planned significant fiscal consolidation, its growth forecasts were systematically too optimistic and they were too pessimistic for countries planning to let spending rise quickly or cut taxes. Read more >>