IMF: Asset booms matter to fiscal policy

Financial Times, March 9th., 2010,

The IMF said that it did not take proper account of asset price booms when assessing Ireland’s fiscal situation in a paper today. The paper said that the IMF’s calculation of the structural fiscal balance of Ireland was broadly based on the OECD approach.

“While this approach works well in many cases, recent events have highlighted its limitations under certain circumstances, such as property or other asset price booms.” It continues on to say that in the Irish case, not accounting for sectoral chances has the potential to “create serious biases in the estimation of the structural balance.”

The biases, the paper says, “are particularly dangerous in the case of asset price booms, because they can come to an abrupt end, revealing large fiscal holes that require painful adjustments - as is being experienced by Ireland.” The IMF has published an alternative model to assess structural fiscal revenue, which takes into account asset booms, and if adopted, has the potential to affect all members of the EU. (Under the Stability and Growth Pact, EU members must maintain a medium-term fiscal objective, defined by their structural fiscal balance).