One of the things I did when I recently spent a week at the European department of the IMF was talk about multipliers. What I said was a version of this post. With fixed real interest rates the starting point for the government spending multiplier in New Keynesian theory is one, and most elaborations make it larger than one. These elaborations include that austerity will reduce inflation, which with fixed nominal interest rates could mean higher real interest rates.[1]  You can then add something for hysteresis effects, or any supply side effects if the government spending is investment rather than consumption. You can also add an effect from credit constrained households which, as Paul Krugman points out, are a key feature of deleveraging. So theory suggests something significantly larger than one, which is exactly what the IMF now finds.

It would be overstating things to say that the IMF's analysis proves this theory is correct. It is just not detailed enough to be a very good test. New Keynesian theory suggests austerity achieved through temporary income tax increases will have a smaller multiplier, as I discussed here.  Tax changes that impact directly on inflation will have different impacts, as I suggest here. The IMF's analysis looks at the budget deficit as a whole, so it cannot discriminate in this way.  However New Keynesian theory does suggest that multipliers can be large, and the IMF analysis suggests they have been large.

Those of us who got it right may therefore have simply had the insight to use standard theory. Those that used multipliers of around a half for fiscal consolidation packages that leaned heavily on spending cuts seemed to discount this theory, and instead may have been following evidence that was not applicable at fixed nominal interest rates.[2] . While there is plenty wrong with New Keynesian theory, it is also important to note when it gets things right. It is also important to note an occasion where thinking about macroeconomic theory can be rather more useful than naively following the evidence of the past.