The IMF's Lagarde Is Unaware What The IMF's Market-Moving Report Contains

While the exquisitely tanned replacement of former IMF head and Sexcapade-extraordinare DSK, Christine Lagarde, who may or may not have nationalized the entire UV-tanning light inventory of CNBC's Fast Money show, is very much aware of what the latest fashion in leather jackets or what the most fashionable plumage of pret-a-porter Hermes sweaters of the Fall season is, she sadly has absolutely no insight into what the actual contents of the IMF's most watched semi-annual report are, as confirmed by the following exchange between her and an Irish Examiner journalist, that has to be seen to be believed. Critically, not only is it clear that Lagarde has not read the WEO report but the section that IE's Ann Cahill asks about brings up a critical systemic problem in the IMF's over-estimation of growth forecasts in a world of increasing fiscal consolidation - an asymmetric fiscal multiplier.


Christine Lagarde made three crucial mistakes during the Eurogroup press conference.

The first, and most obvious, was letting her guard down and showing off the elite toffee-nosed arrogance that pervades the entire European Council when she initially "who are you and where are you from?" dismissed the Irish Examiner's Ann Cahill, who while failing to hobnob with the Paris Fashion show glitterati, knows enough about finance to shame the head of the world's bailout organization.

The second, which was apparent from Lagarde's parrot-like generic response to Ann's well-thought-out question, was the obvious fact that Lagarde had not read the World Economic Outlook document...

Forward to 36:00 in the following clip to see the initial 'WTF' moment and then the stumble-bumble around the actual question


The third, and perhaps most critical given Lagarde's dismissal of it, is the fact that Ann Cahill's question was extremely astute and points out a huge potential problem of over-confidence in all of the IMF's forecasts.


In Box 1.1 - Are We Underestimating Short-Term Fiscal Multipliers? - the IMF undertakes an important investigation into the fact that their forecasts are consistently over-estimating growth in the real-world.

The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.

This might sound like a 'good' thing - but critically as Ann Cahill's question pointed to, in a world of fiscal consolidation, the 'under-estimation' of fiscal multipliers means the effect of a fiscal drag is under-estimated and so growth is over-estimated.


In fact, when we look at the errors (below), instead of the nice linear regression that they see in the chart, we notice (the red and green slopes) a much more pronounced asymmetry to the fiscal multiplier over-/under-estimation.


The forecast of fiscal consolidation rises (to the left on the x-axis), so the errors of over-estimating growth (up on the y-axis) increase; and vice versa.


What this means - simply put - is that it appears there is momentum in fiscal multipliers or at the very least, there is a much more marked downside to fiscal consolidation than upside to fiscal expansion.



Source: IMF