The Economic and Political Case for Coordinating Fiscal Stimulus

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 G- 20 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.