Friday, November 9, 2012

International Winners and Losers Should the U.S. Hit the the Fiscal Cliff

From Econbrowser:

The Fiscal Cliff: International Implications
 ...Nonetheless, with interest rates at zero, contractionary fiscal policy is likely to have large (negative) effects. (Obviously, I am ruling out “expansionary fiscal contraction”; strangely, I do not hear much discussion of this outcome being likely, this time around -- where is the Republican JEC when you need cheering up?).

The IMF, using slightly different numbers, concludes:
The fiscal contraction built into the fiscal cliff is 4 percent of GDP (3 percent of GDP more than in the WEO baseline). A range of models is used to consider the short-term impact of the fiscal cliff, from simple calculations with tax and expenditure multipliers to fuller scenarios using various modeling approaches, each of which has its own assumptions regarding the permanence of the cliff and associated confidence effects (Fig. 14). The largest—not necessarily the most likely—hit to US growth comes from the G-35 model because it treats the cliff as temporary (i.e., private consumption does not rise to offset lower public demand), and since it builds in negative confidence effects (i.e., a 15 percent drop in stock prices, partially offset by lower long bond yields on account of the lower debt path). The spillovers from this model are also larger, and operate mainly via trade channels, which is why neighbors are most affected (Fig. 15). But China and several advanced countries would also suffer up to one quarter of the hit taken by US growth. Lower commodity prices—6–12 percent for energy and 3–6 percent for non-energy, depending on confidence effects and policy responses—also adversely affects net exporters of these goods. Were the assumed confidence effects more negative, so would be the spillovers. (page 10)
Exhibit 14 from the paper tabulates the various estimated impacts and assumptions.

Exhibit 14 from IMF (2012).
The estimated impacts are relative to WEO baseline (which includes a 1 ppt of GDP contraction), so they pertain to a 3 ppts of GDP contraction. Multipliers pertains to application of multipliers as in most of the calculations, e.g., GS. GIMF, GPM and G35 are Global Integrated Monetary and Fiscal model [1], Global Projection Model [2] and a panel unobserved components model of 35 economies (Vitek 2012) [3].
The (relative) impact on economies around the world is illustrated in Exhibit 15.

Exhibit 15 from IMF (2012).
Clearly, the impact is (relatively) largest for our neighbors, Canada and Mexico. But the impact on some other economies in a precarious state –- the UK, Germany, China, and Japan –- is also noticeable....MORE