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Africa fiscal deficit

Multipliers in Europe and Africa

Shanta Devarajan's picture

IMF Chief Economist Olivier Blanchard created quite a stir at the recent American Economics Association Meetings when he presented his joint paper with Daniel Leigh that showed that, for 26 European countries, the fiscal multipliers—the amount by which output expands with an increase in the fiscal deficit—were considerably higher than previously thought.  Whereas these multipliers were previously thought to be around 0.5, they find them to be above 1.0.  Applying these figures to a reduction in the fiscal deficit (sometimes called “fiscal consolidation”), Olivier and Daniel suggest that people may have underestimated the extent to which European economies would contract in the wake of their fiscal consolidation.