IMF Auditor Says Fund Pushed Too Early for Austerity on Richer Countries

The International Monetary Fund ignored its own research and pushed too early for richer countries to trim budgets after the global financial crisis, the IMF’s internal auditor said on Tuesday.

The Washington-based multilateral lender, concerned about high debt levels and large fiscal deficits, urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis.

At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries, the Independent Evaluation Office, or IEO, said in a report that analyzed the IMF’s crisis response.

“This policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers,” the IEO wrote.

The IMF advises its 188 member countries on economic policy, and provides emergency financial assistance to its members on the condition they get their economies back on track.

The internal auditor said the IMF should have known that the combination of tight fiscal policy and expansionary monetary policy would be less effective in boosting growth after a crisis. Evidence showed that the private sector’s focus on reducing debt made it less susceptible to monetary stimulus.

In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

via CNBC

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