“It is inconceivable that policymakers today, aided by their theoretical understanding of the mechanisms and by the statistical information at their disposal, would begin to make the serious errors committed by the governments in 1929-32.” J. Tobin
*This was written in November, published today only with a change in tense to reflect these are comments on the OBR’s previous forecast and not what will be revealed later this week. In short, be cautious about the headlines that surround the OBR’s medium-term forecasts.*
With Sunak’s Spring Budget later this week, and associated Office for Budget Responsibility’s (OBR) forecast update, it’s worth recalling some key judgments from Autumn.
Last week’s press conference was the second time less than 12 months that the European Central Bank’s (ECB’s) communication of a key policy initiative fell short. The first occasion, of course, was on 12 March last year, during the announcement of the EUR120 billion asset purchase program (APP) expansion, when President Lagarde insisted “we are not here to close spreads”—a comment that has the rare distinction of being footnoted and clarified in the transcript. Just 6 days later the Pandemic Emergency Purchase Program (PEPP) was rushed through, a program certainly designed to closed spreads.
The original Argentina-IMF program agreed in 2018 with the Macri administration is coming under growing scrutiny as a replacement arrangement is being negotiated once more. Last week, legislators sent a letter to IMF Managing Director Georgieva to complain about the Fund’s involvement with Argentina, apparently broken into 31 different points.
In particular, Senators are suggesting the Fund broke the Article VI of the IMF’s Articles of Agreement in the original program, under pressure from Macri via the Trump administration, and that as a result the Fund should accept responsibility for the failure—including by setting no conditionality in the program under negotiation.
THE EUROPEAN COMMISSION sits as non-resident to the euroarea in the convention of EU balance of payments (BOP) accounting, and has its own BOP published by Eurostat. Transactions between the euroarea and the Commission as part of the EU Budget or due to occasional EU borrowing operations, therefore, registers in their respective balance of payments. And this matters for forecasting the euroarea current account in the period ahead—a concept not yet grasped by either the IMF or, as today, the European Commission.
A quick note on public debt sustainability in a world where i < g defined here as secular stagnation. There are a number of observations here relative to standard analysis when i > g.
For example, the primary balance does not depend on the bequeathed public debt stock at all, only on the future stock. So, there is no need to worry about stabilizing the backward-looking stock. Instead the focus should be the sustainable stock at some point in the unknown future when secular stagnation comes to an end.
In addition, it is possible to redefine public debt sustainability during secular stagnation as depending on the ratio of possible needed primary balance adjustment to the change in average interest rate on debt expected during normalisation.
I don’t have time to work on this properly, so if anyone wants to recycle this to influence the debate on fiscal policy, feel free.
ITS USEFUL to be reminded once again of the flaws that underpin the IMF’s World Economic Outlook (WEO) publication—as well as the fact that the Fund continues to fail to pursue her global multilateral surveillance responsibilities. Indeed, last week’s WEO provides yet more ammunition for those who claim the Fund peddles style and not substance, lacks an analytical basis for meeting her obligations.
But first the good news. This blog noted in a belligerent style how the April WEO assumed the global current account moved from a surplus “discrepancy” of USD375BN in 2019 to deficit of nearly USD375BN. The discrepancy itself is a puzzle that we need not solve here. But that doesn’t mean it can be assumed away.