IMF Paper Outlines Fiscal and Monetary Exit Strategies
The IMF just recently released a new report, Exiting from Crisis Intervention Policies, arguing that as the crisis winds down, it is more important than ever for policymakers around the world to develop and implement exit strategies for policies enacted to combat the crisis. According to the report, the strategic goal should now be to reverse the rise in debt, not just stabilize it at pre-crisis levels. Back in July 2009, CRFB called on policymakers to do exactly this.
The report advised most advanced economies to maintain stimulus in 2010 and begin tightening in 2011 (so long as the recovery proceeds as expected), yet emerging economies can begin fiscal tightening now. In advising this, however, the IMF affirmed that the timing and details of each country's tightening will differ, but that "macroeconomic stimulus should not be withdrawn until there is firm evidence of durable financial and a self-sustaining recovery in private demand."
Also included among the report's recommendations and findings were:
- Effective exit strategies should include integration among sectors and policy areas, flexibility, market-based incentives (to the extent possible), and clear communication of basic principles and plans for tightening.
- Specific debt targets should reflect country-specific characteristics (for many advanced economies, targeting debt ratios below 60 percent -- a level also recommended by the Peterson-Pew Commission on Budget Reform -- may be appropriate; emerging economies should aim even lower).
- Ensuring fisal sustainability should be a key priority, and will be a policy challenge.
- Although temptation to stabilize debt at high levels will be strong, high levels of debt into the medium-term pose significant drawbacks.
- Unwinding many parts of fiscal and monetary stimulus should not be overly challenging, given that they were temporary in nature and were set to unwind on their own.
- Measures to increase growth can facilitate fiscal adjustment.
- Exiting from some monetary stimulus programs, such as purchases of public sector securities, may be more difficult because they may signal that a robust recovery is underway.
- Governments should design strategies for monetary stimulus unwinding so as to assure the independence of central banks.
- The potential for international spillovers from exit policies highlights the importance of international consistency, and potential benefits also exist from international consistency.
The report once again reiterated the IMF's belief that strategies for fiscal consolidation should be communicated now to reassure markets (see CRFB's Announcement Effect Club).