In recent days the IMF has publicly argued that “markets need to end their addiction to credit ratings”. They suggest:
[t]he real solution lies in reducing the reliance on credit ratings as much as possible. This should start with removing the mechanistic use of ratings in rules and regulations, which some countries are already beginning to do. Investors must be weaned off credit ratings too. Policymakers should persuade the larger ones, at least, to perform their own risk assessments as part of deciding what to buy or sell.
I wonder what our State governments will make of this advice, given that they behave as if their sole task is to maintain the public balance sheet in a state that will please Standard and Poors.
The IMF has also examined the evidence in favour of fiscal austerity, assessing when and to what extent governments should begin to repair their balance sheets in the wake of a recession. They end up finding that fiscal contractions are contractionary, and fiscal expansions are expansionary, a vindication of Keynes. This might seem obvious, but it’s far from the ‘Washington Consensus’ view imposed on various nations throughout the 1990s.
The results suggest that recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized reces- sions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast, expansionary fiscal policy seems particularly effective in shortening recessions associated with financial crises and boosting recoveries.
I’m not sure what has happened to the IMF, but this sudden rash of common sense is definitely a good sign.