Imf Fiscal Policy for the Crisis

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IMF STAFF POSITION NOTE
December 29, 2008 SPN/08/01

Fiscal Policy for the Crisis

Antonio Spilimbergo, Steve Symansky, Olivier Blanchard, and Carlo Cottarelli

I N T E R N A T I O N A L

M O N E T A R Y

F U N D

INTERNATIONAL MONETARY FUND Fiscal Policy for the Crisis1 Prepared by the Fiscal Affairs and Research Departments (Antonio Spilimbergo, Steve Symansky, Olivier Blanchard, Carlo Cottarelli) December 29, 2008

CONTENTS

PAGE

Executive Summary...................................................................................................................2 I. Introductory Remarks .............................................................................................................2 II. Fiscal Policy in Financial Crises—Lessons From History ...................................................4 III. Composition of a Fiscal Stimulus ........................................................................................4 A. Public Spending on Goods and Services...................................................................5 B. Fiscal Stimulus Aimed at Consumers .......................................................................6 C. Fiscal Stimulus Aimed at Firms ................................................................................7 IV. Sustainability Concerns .......................................................................................................7 A. Some Proposals for Discussion.................................................................................9 V. A Collective International Effort ........................................................................................11 VI. Conclusion .........................................................................................................................12 Appendix I: Spending and Revenue Measures ........................................................................13 Appendix II: Fiscal Multipliers—A Review of the Literature.................................................17 Appendix III: Five Case Studies of Fiscal Policy During Financial Crisis .............................22 A. Great Depression and Fiscal Policy ........................................................................22 B. Japan: Banking Crisis in 1997.................................................................................24 C. Korea: Economic Crisis in 1997 .............................................................................26 D. Savings and Loan (S&L) Crisis in the US (1980s–1990s) .....................................29 E. The Nordic Banking and Economic Crises .............................................................32 1

This note has benefited from contributions by Oya Celasun, Lone Christiansen, Borja Gracia, Anna Ivanova, Daehaeng Kim, Chris Papageorgiou, Martin Schindler, Steve Tokarick, and Thierry Tressel. This note includes three attachments on: (1) specific revenue and spending measures; (2) the size of fiscal multipliers; and (3) historical evidence on fiscal policies during banking crises (Korea, Japan, Nordic countries, Savings and Loans, Great Depression).

2 EXECUTIVE SUMMARY The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy. The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived...
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