Thursday, April 18, 2013

The Debt-Growth Debate

It seems the famous 2010 paper "Growth in a Time of Debt" by Reinhart and Rogoff may have some serious calculation errors. You may recall that it proposed that growth slows dramatically when government debt goes beyond the 90% of GDP mark. A new study by Herndon, Ash and Pollin points to data errors in the original paper resulted in an overly dramatic reduction in the growth rate for the debt greater than 90% category.

The Economist: Revisiting Reinhart-Rogoff

As the above graph points out, the Herndon, Ash and Pollin paper still finds that there is a negative correlation between debt and growth, but that going over the 90% mark doesn't immediately mean that the end of days is here.

Revisiting Reinhart-Rogoff
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo

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