Growth Forecast Errors and Fiscal Multipliers

IMF Working Papers, January 3, 2013

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This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis.
In advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis.
A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters.
The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

Stronger planned fiscal consolidation correlates with lower-than-expected growth in advanced economies.
The relation between planned consolidation and negative growth forecast errors was particularly strong early in the crisis (both statistically and economically).
The relation weakened in more recent years; possible explanations include:
- learning by forecasters; and
- smaller fiscal multipliers than in the early years of the crisis.

The observed pattern is naturally interpreted as evidence that fiscal multipliers were substantially higher than implicitly assumed by forecasters during the crisis.
Changes over time in the strength of the relation suggest adjustments in forecasting assumptions and/or changes in the size of multipliers.

Subject: Expenditure, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Fiscal stance
Keywords: a number of economy, estimation code, estimation result, estimation strategy, Europe, Fiscal consolidation, fiscal multiplier, Fiscal multipliers, Fiscal policy, Fiscal stance, forecast error, forecasting, government expenditure, IMF staff note, least squares, liquidity trap, output fluctuations, potential GDP, reports IMF staff assumption, taxation, WEO database, WP