IMF's Lipsky says crisis requires large fiscal stimulus

WASHINGTON (Reuters) - A large-scale global fiscal stimulus is needed to counter the financial crisis, which has blunted the impact of interest rate cuts, a senior International Monetary Fund official said on Monday.

IMF studies had determined that a global fiscal stimulus in the region of 2 percent of gross domestic product was justified, said John Lipsky, the IMF's first deputy managing director.

"With inflation receding, many advanced and emerging economies can ease monetary policy. Generally speaking, however, monetary easing is likely to be less effective at stimulating demand while financial conditions remain disrupted," he told students at Johns Hopkins University.

The global financial crisis, emanating from the collapse of the U.S. housing market, has prompted major central banks -- including the Federal Reserve and the Bank of England -- to slash rates in a futile bid to avoid a recession.

Economic data have already shown that Japan and the euro-zone economies are in a recession, with the British and U.S. economies heading in a similar direction.

Lipsky said it was imperative that fiscal expansion should play a role in sustaining global demand, a view that was endorsed by leaders at the G20 summit last Saturday.

"Our research suggests that global fiscal stimulus on the order of 2 percent of GDP is justified. Moreover, fiscal policy action would be more effective if it were implemented in key trading partner countries more or less simultaneously," he said.

So far, there has been little coordination in the crafting and announcing stimulus packages by the various governments.

While pushing for more government funds to deal with the crisis, Lipsky acknowledged that fiscal action might not be appropriate in countries with great vulnerabilities or those were debt sustainability is a major concern.