Size of global fiscal stimulus not clear –

Start with a simple question and you will not often get a simple answer.

We know what the impact of monetary policy will be around the world. We can measure interest rates, look at the money supply, and examine the central bank balance sheet. We may not know the exact monetary transmission but we know what the central bank is doing.

Now, ask the question of how much fiscal stimulus is occurring around the world and we do not have a clear answer. We might know what the government says it will spend or would like to spend but we do not know what will actually be spent. We may not know the timeframe of the fiscal action and we do not always know the form of the spending. We will know after the fact what was the financing required as measured by the budget deficit but the true fiscal stimulus is not an easy issues to address. So, if we ask the question of how much fiscal stimulus is being applied around the global there is no agreement on the numbers. If we cannot agree on the numbers, it will not be clear whether governments are actually following Keynesian stimulus policies.

The Peterson Institute gives a good example of about the uncertainty of the stimulus. The IMF and JP Morgan have both gathered information on what they believe to be the announced fiscal policies. This would be on top of any countercyclical spending associated with declining tax revenues and sticky spending. If we are in a deep recession bordering on depression these numbers should be big. This is not clear. Even if we can agree on the size of the fiscal stimulus we do not know what will be the multiplier effect on GDP. (A similar problem exists with monetary policy because we do not know the money multiplier for a given amount of monetary expansion.)

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An alternative measure of the stimulus can be found on Dani Rodrik’s blog at Harvard University. Someone form the ILO provides their measure of stimulus and their numbers are higher.

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So what is the right number? We cannot get a fix on this so it is unclear whether we are being too cautious. I would argue that the credit transmission mechanism is the most important and easiest to manage and needs to get right immediately. This calls for the US Treasury to provide a clear program. If we miss on the fiscal side, we should be able to fix but if the credit infrastructure is not in place we will not be able to provide growth in the long-run.