Financial Crisis Response
FINANCIAL CRISIS RESPONSE : IMF Spells Out Need for Global Fiscal Stimulus
By Camilla Andersen IMF Survey online December 29, 2008
• Large drop in demand requires substantial fiscal stimulus
• Stimulus should focus on spending, targeted tax cuts
• International dimension calls for collective approach
As the world struggles to contain the continued fallout from the financial crisis, attention has shifted from rescuing failing financial institutions to supporting domestic demand, which has fallen off sharply almost everywhere.
In November, the IMF cut its forecast for global growth by ¾ percentage point to 2.2 percent for 2009. But, with the crisis spreading rapidly, IMF First Deputy Managing Director John Lipsky has said that the Fund is likely to make further downward revisions in the new global forecast it will announce in January 2009.
In this interview, Olivier Blanchard, Economic Counsellor, and Carlo Cottarelli, Director of the Fiscal Affairs Department, flesh out the call for a global fiscal stimulus, first proposed by IMF Managing Director Dominique Strauss-Kahn in the context of the November 15 emergency summit called by the leaders of the Group of 20 (G-20) industrialized and emerging market economies.
IMF Survey online: Almost every day, we hear about companies cutting back on production or going out of business because people have stopped consuming. Why are we witnessing such a dramatic fall in demand almost everywhere in the world?
Blanchard: The financial crisis has now evolved into a broader economic crisis, triggered by a freeze of the credit market, large wealth losses, and a loss of confidence. The result is a sharp fall in private demand. There are indications that the contraction in demand could exceed anything seen since the Great Depression in the 1930s. So this is a crisis of historical proportions.
IMF Survey online: The IMF has spoken of the need for a large fiscal stimulus totaling 2 percent of global GDP. What can a fiscal...
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