Both Blanchard and the IMF have got form on these matters. In early 2013, Blanchard and his colleague
Economists have struggled for decades to arrive at a consensus on how big the multiplier really is. While still being far from agreement, there is a general view that it is low. Indeed, a fiscal expansion, once all the other feedbacks are taken into account, may even lead to GDP rising by less than the size of the stimulus. In contrast, Blanchard and Leigh argued that, in the current circumstances, it is large and positive. So a fiscal contraction, the basis of the chancellor's policies, will lead to the opposite, to a sharp reduction in GDP. Events have shown this to be wrong.
The IMF duo approvingly cited other estimates, derived from the exotically named dynamic stochastic general equilibrium (DSGE) models, that the multiplier is large. These models have been all the rage in both top academic circles and central banks. Blanchard eulogised them in a
An inescapable problem for these highly mathematical models is that they do not take into account sentiment, the narrative which emerges around policy changes. Osborne's fiscal contraction has gradually created a positive narrative across companies, so they are willing to create jobs and invest. Psychology rather than hardline maths is needed to tell us what the multiplier really is in any particular situation.
Most Popular Stories
- Prosecutor to Investigate Walmart Police Shooting
- GM to Announce New Jobs in Tennessee
- Smith & Wesson Misses Target
- Emirates Hit Libyan Targets With Airstrikes
- Mark Sanchez Suddenly a Hot QB Commodity
- Michael Brown Funeral: Can Americans Change the Script of Violence?
- Marco Rubio Warns Obama on Deportations
- American Killed With ISIS Fighters in Syria
- Surf's Up! SoCal Prepares for Big Storm Surf
- Hamas Claims Gaza Ceasefire as Victory Over Israel