In an IMF working paper Daniel Leigh and Sven Jari Stehn have analysed how G-7 economies respond in previous crisis (US, UK, Canada, Germany, France, Italy and Japan). They analyse impact and timing of both monetary and fiscal policy.
Main Findings:
It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon” countries, but the response differs substantially across fiscal instruments.
Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.
Another shot in the arm for fiscal policy from IMF. The view that fiscal policy is not as bad is gathering pace. It will be a big lesson from the crisis. The other ideas are getting thrashed but fiscal policy advocacy is increasing. And this is not mainly because government spending is the last option that is why we need to build support. But it is being based on some empirical work (however, empirical models themselves are being questioned but am no authority on it).
Anyways, this paper is quite an excellent one which in a snapshot tells you how fiscal/monetary policy has responded in G-7 economies. Apart from this they also point that policies focus more on contraction and relax a bit while economies get back on track. They also suffer from overestimating the downturns and usually do much more than is needed.
Very interesting paper.
