Saturday, 17 November 2012

Fiscal policy, multipliers and austerity in the UK again

http://www.fulcrumasset.com/datasource/frp201211.pdf

Gavyn Davies suggests that fiscal policy has not contributed that much to why the US has recovered fater than the UK (the US has had looser fiscal policy).  Here's the puzzle:

 

and here's comparative fisscal stance, the US is looser:

 

As he says, these estimates depend heavily on the multiplier. Higher multipliers give more weight on fiscal tightening. But there's a catch to higher multipliers if you want to assume them that I think is interesting: 

The assumption of higher multipliers also creates another problem. If fiscal and export multipliers are higher than we have assumed, then the implication is that the output gap in the UK economy is also very high. This can only have occurred if the growth in potential GDP was also very high. For example, a fiscal multiplier of 1.3 would imply that UK potential GDP growth has averaged 3.2% per annum in the years of austerity, significantly above its 1950- 2007 average of 2.4%, and also significantly above the recorded growth of productivity over the period.


BTW, he says the problem is that we are not exporting relative to the US


our exports being concentrated to the Eurozone that is so weak.

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