There is no consensus among economist as to why estimates of fiscal multipliers are less reliable guides to the effectiveness of alternative fiscal responses to the recent global recession. At the onset, Baldwin (2009) asserts that there is yet no solution to stop the global economic crises. However, everyone agrees that fiscal stimulus plays a key role in reducing the length and depth of the recession. Unfortunately, the lack of clarity on fiscal policy made it quite uneasy for economist to make accurate estimates (Baldwin).
Baldwin noted that while other nation such as the United States, the U. K. and Japan have urgently responded by committing to fiscal stimulus, others such as Germany however do not see its urgency.
This full-pledge recession which was seen to have been caused by a strong reduction in aggregate demand, due to a large decrease in financial wealth, an increase in precautionary saving on the part of households, increasing difficulties in obtaining credit, and wait-and-see attitude on the part of consumers and firms in the face of uncertainty (Regional Economic outlook, p.29), has lead to a large debate among economist regarding the potential impact of the huge fiscal packages to address the issue of fiscal response to the recent global recession.
Baksa, Benk, and Jakab (2009) implied that another reason why estimate of fiscal multipliers are less reliable was the lack of sufficient information on what “agent think of the future financing of these fiscal packages (p. 3).
In view of this problem, there is no credible estimate of fiscal multipliers as aside from the lack of enough studies on this field, researchers find it difficult to assess “the impact of the discretionary fiscal stimulus (Regional economic Outlook, p. 31). As mentioned earlier, the drop in aggregate demand created uncertainties which made it difficult for economist to estimate the impact of fiscal multiplier if indeed there is.
One reason for this drop was the difficulties in obtaining credit. In a paper published by the International Monetary Fund titled “Global Economic Policies and Prospect” the paper cited that the limited progress of advanced economies in addressing the impact of global crises is the high uncertainty regarding bank solvency. This, according to the paper prevents the restoration of market trust which impaired the credit conditions.
The prevalence of this uncertain atmosphere in various fields contribute to the dilemma why estimate on fiscal multipliers are less reliable guides to the alternative fiscal responses to the recent global crises as this problem further create more uncertainties such as the soaring commodity prices which, in view of the slowing global activity are unlikely to recover (Global Economic Policies and Prospect, p. 6).
Since alternative fiscal responses are simply grounded on the tax measure and high expenditures as these two are usually the main vehicle towards economic recovery, estimates on the fiscal package in response to global crises could hardly serve as guide to the effectiveness of responses to the global crises in view of the limited capability and precautionary savings that most people do.
For instance, Spilimbergo Symansky, and Schindler (2009) provided a clear discussion regarding fiscal multiplier defining each term including its basic function such as for example, the size of multipliers which is larger if leakages are few, if the monetary conditions are accommodative, and if the fiscal position after stimulus are sustainable. With concrete understanding of the operation as well as the implication of such terms, corporate business can carefully evaluate each measure to take into account the uncertainties the might loom ahead.
Another way the advice offered by the IMF economist takes into account uncertainty regarding the most effective measure was by drawing on the lessons gained from the similar crises in the past. Spilimbergo, Symansky, Blanchard, and Cotarelli (2008) assert that based on the past experience, it is important to achieve sustained growth which can be attained through successful resolution of the financial crises. They also emphasized on fixing the financial system and support the aggregate demand. The logical assumption on this measure is that the fiscal stimulus simply relies on spending measures.
That is, as Spilimbergo, Symansky, Blanchard, and Cotarreli explained, with out expenditure measures, we are facing the current risk of a more prolonged down turn. In other words, when the purchasing power of households is raised, and if governments increase their purchases by putting idle resources to work, there can be sustained economic activities and transactions will move forward. The content of the FRBSF economic letter dated June 19, 2009 affirms that government and household spending are key components of GDP which are important in taking uncertainty into account.
The main argument here is that investments and business transaction will materialize when households and confident to spend more. Thus the article puts it, “Large-scale econometric models often used in policy making institution make adjustment for household behavior (FRSBF Economic Letter, p. 1). Finally, IMF economist advices the central bank “to provide liquidity against good enough collateral” (Blanchard 2009, p. 16) explaining that access to such funds, financial institution could still be vibrant even without selling their assets “at fire sale price.
” With these advices, economic activities are expected to be more active and take into account uncertainty. References Baksa, D. Benk, S. & Jakab, Z. M. (2009) Does The Fiscal Multiplier Exist? : Fiscal and Monetary Reactions, Credibility and Fiscal Multipliers in Hungary Baldwin, R. (2009) The IMF on Fiscal Policy Crises http://www. voxeu. org/index. php? q=node/2743 Blanchard, O. (2009) The Crises: Basic Mechanisms, and Appropriate Policies The International Monetary Fund FRBSF Economic Letter (2009) Fighting Downturns with Fiscal Policy
Group of 20 Ministers Meeting and Central Bank Governors (2009) Global Economic Policies and Prospects International Monetary Fund Monetary Fund (2009) Regional Economic Outlook, Europe, May 2009: Addressing the Crises USA: International Monetary Fund Spilimbergo, Spilimbergo, A. Symansky, O. Blanchard, O. & Cottatrelli, C. (2008) Fiscal Policy for the Crises The International Monetary Fund Spilimbergo, A. Symansky, S. & Schindler, M. (2009) Fiscal Multipliers International Monetary Fund