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?
The dust has yet to settle on the Bundesbank’s fight with the ECB over bond-buying, but this has not stopped Germany’s central bank from taking on another heavyweight global financial institution: the International Monetary Fund.
BuBa’s monthly report, published on Monday, includes a whole chapter entitled: “The IMF in a changed global environment.” It becomes clear fairly quickly that eyebrows are being raised in Frankfurt at some elements of the IMF’s stance in the eurozone sovereign debt crisis, where the Fund has taken on its own lending and acted as a member of the “troika” of IMF, ECB and European Commission officials advising on bailouts.
“By taking on excessive risks, the IMF would gradually transform from a liquidity-providing mechanism into a lending institution,” the bank says on the first page of its 15-page discussion. “Such a transformation would neither accord with the legal and institutional provisions of the IMF agreement, nor with the fund’s financing mechanism or its risk control functions.” Read more
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Fed chairman Ben Bernanke faces Congress next week for the central bank’s twice-yearly Monetary Policy Report to the Senate and the House of Representatives.
Will Mr Bernanke offer any clues that the launch of QE3 is imminent? This from the FT’s US economics editor Robin Harding: Read more
When IMF officials travelled to Iceland in the summer of 2008, they pronounced the health of its financial sector to be good.
The banking system’s reported financial indicators are above minimum regulatory requirements and stress tests suggest that the system is resilient.
IMF, Iceland: Financial Stability Assessment – update, 19 August 2008
Within two months, the island’s three biggest lenders had collapsed, leaving its economy in tatters. Read more
St Peter's Square. Image by Getty.
Tired of all the talk of currency wars, the Holy See wants peace.
The Vatican this week called for G-20 leaders, meeting in Cannes early next month, to set up a global central bank. The Pontifical Council for Justice and Peace’s statement is only available in Italian but here’s an article from the Telegraph:
Such an authority would have “universal jurisdiction” over governments’ economic strategies.
Existing financial situations such as the World Bank and International Monetary Fund were outdated and no longer able to deal with the scale of the global financial crisis, which had exposed “selfishness, greed and the hoarding of goods on a grand scale”.
The global financial system was riddled with injustice and failure to address that would lead to “growing hostility and even violence”, which would undermine democracy.
The church’s call for action is not dissimilar to a point made by some of the world’s leading economists. Read more