Wednesday, April 17, 2013

Does High Public Debt Consistently Stifle Economic Growth?

Thomas Herndon, Michael Ash and Robert Pollin show in this new paper that the studies by Carmen Reinhart and Kenneth Rogoff which correlate national debt-to-GDP ratios over 90% with sharp declines in growth are not correct. They find that when properly calculated, meaning using the full data set not just part of it, the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90% is actually 2.2 percent, not -0.1 percent as published in Reinhart and Rogoff (RR). That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90% is not dramatically different than when debt/GDP ratios are lower. Reinhart and Rogoff claim the mistake resulted from a technical error involving a spreadsheet, and say that they “do not, however, believe this regrettable slip affects in any significant way the central message of the paper.” You would think that growing at 2.2% rather than a recession of 0.1% would make them think that their results are incorrect.

1 comment:

  1. For those interested in reverse causality issues (that is, growth, or more precisely lack of, causes debt) go here The author notes: "Controlling for the previous year's GDP growth largely erases the negative relationship between debt-to-GDP ratio and GDP growth, especially for the range where debt is 30 percent or more of GDP. This is because a fall in GDP precedes the rise in Debt-to-GDP ratio. This is yet another demonstration that the simple bivariate negative correlation is driven in substantial part by reverse causality."


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