ABSTRACT

Almost 10 years ago, the G-20 embarked on what it called “the largest coordinated fiscal stimulus in history.” While the benefits of coordinated stimulus in response to a widespread shock are generally accepted, there is debate about the size of the benefits of coordination, how they are distributed across countries, the potential costs of stimulus when it is undertaken by relatively indebted countries and whether countries genuinely coordinated or whether they were doing the same thing they would have done anyway. The paper explores these issues using data analysis, a new computable general equilibrium model of the G20 and results from in-depth interviews with 61 leaders, ministers, central bank governors and officials from G-20 countries, including Kevin Rudd, Jack Lew, Janet Yellen, Haruhiko Kuroda, Ben Bernanke, Mark Carney, and 55 others. It finds that the first-year GDP gains from fiscal stimulus are twice as large on average for G-20 countries if they coordinate. While most countries benefit a lot, some benefit little and some suffer a loss depending on a range of country characteristics. These GDP gains to the global economy are, on average, a third smaller if stimulus by relatively-indebted countries increases risk premia, but this cost is smaller than the cost of not having stimulus from those countries. Interviews find that coordination from 2008 to 2010 was genuine: more than half of the G-20, particularly smaller economies, did more stimulus because of the G-20. The paper explores the implications of these results for the G-20 in facing future crises.

I. INTRODUCTION

2018 marks the 10-year anniversary of the G-20 as a leader-level forum. It was created at a time when the global financial system was on a precipice. Stock markets were crashing. Credit markets were freezing. Rolling failures across financial institutions were shattering confidence. Within the space of 12 months, the IMF’s forecasts for what global growth would be in 2009 fell from 3.8 to -1.3 percent.

The leaders of the G-20 faced the very real prospect of another Great Depression. But they were determined not to make the mistakes of the past. Along with measures to stabilize markets and buttress the global financial system, they implemented a multi-year fiscal expansion to support demand and protect growth and jobs. Countries increased spending, cut taxes and let automatic stabilizers play their role in what they called “the largest coordinated fiscal stimulus in history.”

Without the actions of the G-20, what started as a financial crisis would have quickly become a trade crisis, then an economic crisis, then an employment crisis, then a social crisis and then a political crisis—Kevin Rudd, 26th Prime Minister of Australia, interviewed September 8, 2017.

While the benefits of coordinating fiscal stimulus in the face of a widespread shock are generally accepted, questions remain about the size of the benefits from coordination, how they are distributed across countries and what impact increased risk premia can have if heavily-indebted countries also participate in fiscal stimulus.

A related issue is whether coordination agreements involve genuine coordination or not. When G-20 countries are hit by a common shock, they often have a prima facie incentive to undertake fiscal stimulus regardless of what other countries do. Did countries do anything different because of the G-20 or was it “business as usual” masquerading as coordination? Conversely, if coordination is genuine and countries alter their policies because of a G-20 agreement, there is potentially an incentive for countries to cheat on the agreement and free ride on the stimulus efforts of others. There is no clear understanding in the literature on whether the G-20 resulted in countries doing more fiscal stimulus from 2008 to 2010 or what role the G-20 plays in boosting the credibility of commitments and defeating attempts to free-ride.

Fundamentally, policy in the United States won’t be pulled by international consensus, it will be driven by domestic policy considerations and domestic politics. There can be a backlash in the United States if you make the argument that you are doing something to comply with international rules rather than as a domestic choice. But consensus from the G-20 was not unwelcome—it certainly helped in getting action from other countries—Jacob Lew, former Treasury Secretary, United States, interviewed September 7, 2017.

Many of these issues relate to the broader question of what role political considerations play in a global coordination agreement. The economic benefits of macroeconomic coordination often receive much more attention in the literature than the political benefits. But the economic and political benefits are difficult to separate in practice. It is the combination of the two that encourages politicians to agree to coordination in the first place. Little is known about the role that the G-20 plays in influencing domestic fiscal policy settings and how politicians and officials use the G-20 to achieve their objectives.

The G-20 provides a framework for politicians to argue domestically to do things that they otherwise couldn’t do but want to do. It provides political backup—Wayne Swan, former Treasurer, Australia, interviewed March 21, 2017.

The G-20 is a forum in which you can share diagnoses, figure out what makes sense and try at the margin to come up with something together that is more powerful than what you would achieve otherwise—Former senior official, United States, interviewed September 12, 2017.

These are the issues explored in this paper. The paper uses data analysis, a new computable general equilibrium model called the G-Cubed (G-20) model (detailed in McKibbin and Triggs, 2018) and results from interviews with 61 leaders, finance ministers, central bank governors, sherpas and finance deputies from G-20 countries to consider both the economic and political dimensions of coordinated fiscal stimulus. Participants included Kevin Rudd, Janet Yellen, Haruhiko Kuroda, Ben Bernanke, Jack Lew, Mark Carney, and 55 other politicians and officials to whom I am deeply grateful.

The paper is structured as follows. Section 2 introduces the G-20’s commitments on coordinated fiscal stimulus. It assesses how well countries did in implementing those commitments and which countries did the heavy lifting.

Section 3 introduces the general equilibrium framework. It finds that the first-year benefits to GDP are twice as large on average for G-20 countries if they act together. But the domestic benefits of coordination depend on characteristics like country size, the actions of your trading partners, openness to trade, monetary policy frameworks and relative price effects. Some G-20 countries benefit a lot, while others suffer a loss because of coordination.

Section 3 also finds that increased risks from fiscal sustainability concerns reduce the aggregate benefits of coordination to global GDP by around a third but, consistent with Auerbach and Gorodnichenko (2017), finds that this cost is smaller than the cost of not coordinating or not having those countries participate in stimulus. Using a game theoretic framework, the paper finds that the incentives to cheat are small.

Section 4 explores whether there was genuine coordination in 2008 to 2010. It finds that more than half of G-20 countries undertook more stimulus because of the G-20, particularly smaller economies. It outlines the economic and political drivers for coordinated stimulus and the mechanisms through which the G-20 influences domestic fiscal settings. Section 5 concludes with a discussion of what these findings mean for the G-20 in dealing with a widespread shock in the future.

Triggs_Case-for-coordination-fiscal-stimulus

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