Menzie Chinn: Expansionary Policy Is Expansionary, Contractionary Policy Is Contractionary
Menzie Chinn:
Econbrowser: CBO on the Stimulus Package, and Still No Expansionary Fiscal Contraction in UK: A couple days ago, CBO released its most recent evaluation of the impact of the American Recovery and Reinvestment Act (ARRA). Using Table 1, I obtain the following implied values for GDP in the absence of the stimulus, assuming low and high values for multipliers. Even with conservative values for the multipliers, the estimates imply that in the absence of the stimulus package, output would still be about $145 billion Ch.2005$ lower than the 2008 peak; under the high range values, approximately $450 billion....
Crossing the Atlantic, one finds that the (short term) evidence in favor of an incipient expansionary fiscal contraction (see here for previous post) is getting weaker and weaker, even for an open economy like the UK. The 2010Q4 estimate for UK GDP was revised down from -0.5% (q/q) to -0.6% (essentially -2.6% on an annualized basis). Hence, the possibility that the negative reading was due to mis-estimation of the impact of bad weather has been largely ruled out, since the estimated impact has been held at negative 0.5 ppts. If one is hoping that at least firms are anticipating positive effects from the coming spending cuts, the behavior of gross fixed capital formation (investment) is not promising. In 2010Q4, this series was declining 2.5% q/q (-9.7% on an annualized basis), contributing -0.4 ppts of the overall 0.6 ppts q/q decline in GDP.
In a commendably understated assessment:
Economist James Knightley at ING said the declining GDP was "fairly worrying given we know about the wave of fiscal austerity that is now starting to hit the U.K. economy. We will soon be starting to see negative figures for this component.
Apparently financial sector economists are not expecting a expansionary fiscal contraction either.
