Macroeconomic Management When Policy Space is Constrained: A Comprehensive, Consistent and Coordinated Approach to Economic Policy

Abstract

DISCLAIMER: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Assessing Fiscal Space: An Update and Stocktaking

“…In particular, where the cyclical position is weak, infrastructure needs exist, spending is efficient, and monetary policy is accommodative, fiscal space could be wider than meets the eye as long as financing exists, due to the potential dynamic effects of a fiscal expansion. This is even more so if stagnation risks loom (see also Gaspar, Obstfeld and Sahay, 2016). Conversely, other things being equal, more volatile and less diversified economies have less fiscal space.…”

“…In this context, more accommodative monetary policies, as would be expected when there is slack in the economy, also support the effects of fiscal expansion by allowing real interest rates to decline and further stimulate private demand. Moreover, as discussed in Gaspar, Obstfeld and Sahay (2016), where the counterfactual is an extended period of low growth and inflation, even if debt rises somewhat as a result of a fiscal expansion, it may be compensated by the benefits of heading off this more severe negative macroeconomic outcome.…”

“…If countries act simultaneously to support their economies this would generate positive spillovers and feed-back effects, which are not captured in the simulations discussed here. However, such a scenario could be constructed if warranted, for example in a situation where large parts of the global economy are in a sizable downturn and coordinated efforts need to be considered (Gaspar, Obstfeld and Sahay, 2016). The fiscal space assessments strengthened the policy recommendations and discussion.…”

Cross‐country spillovers of fiscal consolidations in the euro area

“…For instance, In't Veld () finds that a 1% of GDP increase in government investment in Germany increases the real GDP in other countries by between 0.2% and 0.3% using the QUEST model. Gaspar, Obstfeld, Sahay, and IMF Staff () use IMF's suite of models and find that coordinated fiscal stimulus supported by the comprehensive, consistent, and coordinated approach will lead to a reduction of public debt‐to‐GDP ratio in the medium term due to strong cross‐country spillovers.…”

Labor and Product Market Reforms in Advanced Economies: Fiscal Costs, Gains, and Support

“…Context. Concerns about persistently sluggish growth amid high public debt and mounting long-term fiscal pressures in advanced economies are increasingly reflected in policy debates on the need for structural reforms to durably lift potential output over the medium term (Gaspar, Obstfeld, and Sahay 2016). High on the agenda are a range of reforms designed to strengthen the functioning of product and labor markets.…”