WASHINGTON - THE world economy needs a large helping of fiscal stimulus targeted both at repairing the financial system and boosting demand, the International Monetary Fund said in a research paper released on Monday.

The IMF said the current crisis will last for several more quarters and countries need to act aggressively to reduce the 'perceived probability of another 'Great Depression'.'

'The solution to the current financial and macroeconomic crisis requires bold initiatives aimed at rescuing the financial sector and increasing demand,' the IMF said. 'Time and action are of the essence.'

The Fund has previously said the global economy needed stimulus equal to about 2 per cent of global output, and governments should stand ready to do more if warranted.

Spending increases and targeted tax cuts would provide the biggest bang for the buck, while general tax cuts or subsidies for consumers or companies would have a smaller effect, the IMF said.

The paper did not spell out how much individual countries ought to commit, but rather gave broad recommendations on how best to structure spending programs.

US President-elect Barack Obama is considering a stimulus package in the range of US$675 billion (S$976.5 billion) to US$775 billion, spread over two years. China has proposed just under US$600 billion while the European Commission has called for an EU-wide package worth 200 billion euros (S$403.7 billion).

The IMF said public spending could be used to maintain existing government programmes that might otherwise fall victim to budget constraints, and to fund longer-term investment projects.

Tax cuts for consumers should be targeted at those who are most likely to be credit constrained, and measures such as expanding unemployment benefits would be helpful. The Fund also backed using public money to write down the value of mortgages to help homeowners facing foreclosure.

Tax cuts and subsidies are unlikely to have much effect on companies grappling with falling demand and rising uncertainty, the IMF said.

It also cautioned against governments intervening to prop up certain sectors of the economy because that could inadvertently add to uncertainty as investors try to determine which companies will be rescued.

The IMF said it was essential for governments to make clear that they will do more if needed to help the economy, but also set a time frame for withdrawing stimulus when conditions improve.

'While a sizable upfront stimulus is needed, policy-makers must commit to doing more, as needed, if conditions so warrant,' the IMF said. 'It is important to announce this at the start, so later increases do not look like desperation repairs.' -- REUTERS