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The long and winding road to fiscal adjustment: How the IMF judges austerity programmes

posted Aug 23, 2016, 1:10 AM by Eva Thomann   [ updated Aug 27, 2016, 3:42 AM ]
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During the European debt crisis, numerous states came under pressure from financial markets to consolidate their public finances. Many countries launched austerity programmes that used expenditure reductions and revenue increases to balance their fiscal budgets. Austerity programmes take quite some time to implement and for their effects to become visible. Hence, at the time of their announcement, they constitute mere signals that states send to financial markets to assert their willingness to honour future debt obligations.

Financial markets rely on so called ‘informational intermediaries’ to evaluate the implementation credibility of announced austerity programmes. These intermediaries are public or private organizations such as the International Monetary Fund (IMF) or Credit Rating Agencies which gather detailed information about the willingness and capability of states to implement announced austerity measures. By communicating their assessments, these organizations make the default risk of states ‘legible’ to financial markets. In a recent paper, we studied the decision-making calculus of the IMF when it judges whether announced austerity programmes can be credibly implemented.

Why are the views of the IMF about announced austerity plans so important for assessed countries? (...)

Read the full blog article on the Democratic Audit UK website