Daily Archives: October 12, 2012

Chris Giles

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 >>

When David Marsh wrote his definitive biography of the Bundesbank in 1993, he chose the following sub title: “The Bank That Rules Europe“. Feared and revered in equal measure, the Bundesbank was the model on which the ECB was built. Imitation was not, however, the sincerest form of flattery for Germany’s central bank. The arrival of the ECB removed most of its direct authority over monetary policy, leaving it with only one out of 23 votes on the governing council of the new central bank.

Recently, the Bundesbank’s President Jens Weidmann has been in a minority of one on the question of whether to launch the ECB’s new programme of Outright Monetary Transactions, to which he is fundamentally opposed. He views the proposed purchases of government debt in the troubled eurozone economies as a thinly disguised monetary bail-out of profligate governments, something which the Bundesbank had believed from the very beginning to be outside the intention of the treaties.

 Read more >>