Last week, the International Monetary Fund published a working paper by Olivier Blanchard and Daniel Leigh revisiting the estimates of the effect of austerity that caused such a stir in the October World Economic Outlook. Many people took the box in the WEO as proof of the absurdity in attempts at deficit reduction.
At the time, I published an article and a technical blog in the FT, casting some doubt on the robustness of the IMF’s work. It also caused a minor stir. I included all the data so people could play around with the numbers themselves if they wished.
In December, another part of the IMF published a working paper using different methodology, which found much smaller multipliers. It is not the first time that different parts of the fund disagree. It will not be the last.
What does the new working paper say and what conclusions should we draw?