Thread by @Brad_Setser

The IMF's country-by-country fiscal advice seems to have an "adding-up" problem. In a world marked by low (if not zero) interest rates, the IMF is asking for a roughly 2 pp of GDP global fiscal consolidation (admittedly, over time)

cfr.org/blog/imf-still…

The world, according to the Fund, ran a fiscal deficit of around 3% of GDP in 2018. The IMF thinks that fiscal deficit should fall to around 1% of GDP. To put it uncharitably, the Fund's fiscal advice suggests it still views the euro area as a fiscal model worth emulating ...

A couple of examples of what this means in practice.

The IMF thinks moving toward optimal fiscal policies would reduce Germany's external surplus by 1.2 pp of German GDP. But this mostly comes from fiscal tightening in Germany's trade partners, not fiscal expansion in Germany

e.g. the Fund wants Germany to loosen fiscal policy by 1.5 pp of GDP relative to 2018 (run a structural deficit of 0.5 pp of GDP), but it wants 2 pp of GDP consolidation in Germany's trading partners

China is another case. The Fund wants 3 pp of long-term fiscal consolidation (which would raise China's CA surplus by a percentage point), but that is largely offset by the impact on China of a 2 pp consolidation globally ...

The IMF has been clear that these are the "optimal" fiscal policies only in the medium-run. The Fund doesn't want this kind of consolidation immediately.

But if low or zero interest rates are here to stay and not a transitory phenomenon, the Fund might need to reconsider the scale of its proposed long-term consolidation ...

Wonky, I know.

But important ...

See table 3 of this report for IMF's policy recs. "p" is current policies, "p*" is the IMF's recommended policy stance. the difference is the policy gap (in the IMF's lingo)

imf.org/external/np/re…