Scott Sumner  

The IMF hits a new low

Farewell, Art Carden... McKenzie on Tullock...

The IMF has a reputation (perhaps undeserved) of always getting the policy mix wrong during crises. They also have a reputation for learning from their mistakes---that reputation is definitely undeserved. Here's an example from a recent IMF report:

The IMF's record in surveillance was mixed. Its calls for global fiscal stimulus in 2008-09 were timely and influential, but its endorsement in 2010-11 of a shift to consolidation in some of the largest advanced economies was premature. At the same time the IMF appropriately recommended monetary expansion in these countries if needed to maintain the recovery. However, this policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers. As time progressed and the growth outlook worsened, the IMF showed flexibility in reconsidering its fiscal policy advice and called for a more moderate pace of fiscal consolidation.
Do you see the problem? It sticks out like a sore thumb:
However, this policy mix was less than fully effective . . .
Here's what this is all about. The IMF is admitting they were wrong about Europe. After all, it was Europe that had the double dip recession, not the US. And thus the sentence I highlighted is mostly about Europe. More specifically, the IMF is suggesting that monetary offset was tried in Europe, but somehow was "less than fully effective." I can't imagine even Paul Krugman buying that nonsense. The ECB adopted a tight money policy in 2011, expressly for the purpose of cooling down an overheating eurozone economy, where inflation was exceeding the ECB's policy goals. Now of course that policy was completely insane, and to give the IMF credit they seem to have opposed the policy--or at least they say they did. But for some reason the IMF doesn't seem to realize this policy even happened. In the IMF view the ECB never adopted a tight money policy in 2011, it never created a double-dip recession. Instead monetary policy was expansionary, but somehow "less than fully effective" in offsetting fiscal austerity.


BTW, the ECB's tight money policy of 2011 was supported by lots of very influential people, all over the world. Policymakers, pundits, economists, reporters, bankers, etc. Go back and read the newspapers from 2011. How many have publicly admitted they were wrong? How many have even admitted that tight money policy was implemented?

After I wrote this post I decided to go back to 2011, when the key mistakes were made, to see how forcefully the IMF advocated accommodative monetary policy to offset the fiscal austerity they recommended. Using Google, here's the first example I found, an April 2011 piece from the WSJ:

European interest rates are still far below any level that could be described as normal, and have to be raised sooner or later, a senior International Monetary Fund official said Friday.

"Even if there were no inflationary concerns, it would just not be reasonable to expect interest rates to remain where they are today," Antonio Borges, the IMF's director for Europe, told a press conference during the IMF and World Bank spring meetings. "Nobody can expect interest rates to stay at 1.25%-this is just not possible from a point of view of resource allocation."

The European Central Bank last week decided to raise its key refinancing rate for the first time since the 2008 financial crisis, to 1.25% from 1%, where it had been for nearly two years. Its President Jean-Claude Trichet last week repeatedly said that the bank's governing council hadn't decided that the increase was the first of a series.

Mr. Borges downplayed the negative impact that higher interest rates would have on the weaker, peripheral states of the euro zone, which are experiencing low or negative growth as their governments try to work off excessive debts accumulated during the last decade.

Well I guess that explains why the policy was "less than fully effective." I was mistaken in assuming the ECB ignored IMF advice on the need for monetary accommodation. The IMF was actually cheerleading the tighter money, and waving away fears it might hurt the PIIGS. So the IMF isn't completely incompetent, they are highly skilled at whitewashing their record. Almost had me fooled.

No wonder the Europeans want to destroy Google. No wonder they demand a "right to be forgotten." They have plenty they'd like to forget.

PS. Best of luck to Art Carden

Comments and Sharing

CATEGORIES: Monetary Policy

COMMENTS (8 to date)
Milo Minderbinder writes:

After 1971 and the end of fixed exchange rates, why did the IMF continue to exist?

Brian Donohue writes:

Great post Scott. Smoking gun!

Rajat writes:

Agree with you Scott, but the central problem remains: 99% of economists and commentators see low rates as equivalent to easy money. So a rate of 1.25 or 1.5% is seen as 'highly accommodative' monetary policy, regardless of anything else.

Kailer writes:

After the ECB raised interest rates right in the middle of the sovereign debt crisis the IMF (in the September 2011 WEO) was expecting euroarea growth to drop to 0.5% in the second half and inflation to slow to 1.5% in 2012. They went to great lengths detailing all the awful risks to the eurozone economy. This was their only reference to the ECB policy rate:

Given declining inflation pressure and heightened financial and sovereign tensions, the ECB should lower its policy rate if downside risks to
growth and inflation persist

(all italics are belong to me)
Don't do anything right now, but if you continue spiralling into depression, then do something.

Mr. Econotarian writes:

That said, "tight" or "Loose" money is likely the least of Europe's problems.

The biggest problem is labor over-regulation, and within many countries, business over-regulation as well.

We are arguing over whether growth is 0% or 1% based on ECB actions, versus 0-1% or 3-5% due to regulation.

Yet when has the IMF come out and said "why don't you just get rid of all labor regulation (outside of fraud) for a few years, then come back later and figure out which ones you really need".

Scott Sumner writes:

Milo, Good question.

Thanks Brian.

Rajat, It seems that way. And yet when I present a talk to economists I am often told afterwards that "of course all good economists know that low rates don't mean easy money."

Kailer, Why am I not surprised?

A writes:

What are the major points of contention, in academia, against market monetarism? The blogosphere seems to focus on various claims that the Fed CAN'T unilaterally debase money. But other commentary focuses upon very weak rational expectations, so that a Fed that can debase money must engage in enormous and unorthodox operations to convincingly advertise the fact. At least, these are my impressions, because most pundits don't come out and say exactly where they think the MM frameworks breaks down. There's a lot of foo foo commentary like how the world is complex; social conventions are difficult to change; and Cantillon Effects exist, therefore explain.

Scott Sumner writes:

A, This may sound strange, but I don't think there is a lot of hostility in academia. I think there is some support, and a huge number on the fence who think the idea deserves further study. There are mixed feelings in the Keynesian, monetarist and Austrian communities, with the idea not being clearly linked to any of the three.

Some people talk about "what would happen if RGDP either rose or fell sharply" implying that the needed movement in inflation would be unwelcome. Most of those people are aware of the theoretical justification for letting inflation move countercyclically.

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