Pre- and Post-GFC Policy Multipliers

IMF Working Papers, November 13, 2020

Source details

Authors: Sam Ouliaris, Celine Rochon
Date: November 13, 2020
Core objective: Estimate the change in policy multipliers in the U.S. relative to their pre-2008 financial crisis levels.
Approach summary: Uses an augmented Blanchard-Perotti model to allow for the dynamic effects of shocks to the central bank balance sheet, real interest rates and debt levels on economic activity.
Context note: Given the elevated debt level and significantly larger central bank balance sheet in the U.S. after 2008, the paper estimates the likely impact of new stimulus packages.

Model used: Augmented Blanchard-Perotti structural VAR framework.
Dynamics included: shocks to the central bank balance sheet, real interest rates, and debt levels and their effects on economic activity.

Expenditure multipliers: "expenditure multipliers have fallen post-2008 crisis because of higher government debt, implying that the effectiveness of fiscal policy has declined."
Quantitative easing (QE) effects: "The analysis also investigates the impact of quantitative easing. The results suggest that it is beneficial, but requires sizable balance sheet interventions to lead to noticeable effects on real GDP."
Crisis cost dynamics: "Because of rising debt stocks, dealing with a crisis is becoming more and more costly despite the current low interest rate environment."
Application to COVID-19: Results are used to assess the impact of the policy packages to address COVID-19.

Fiscal policy effectiveness has declined due to higher government debt, reducing the potency of expenditure-based stimulus relative to pre-2008 levels.
Quantitative easing can be beneficial, but policymakers should expect that "sizable balance sheet interventions" are necessary to generate noticeable real GDP effects.
Rising debt stocks increase the cost of crisis response even when interest rates are low, implying trade-offs between immediate stabilization and longer-term debt sustainability.