1 / 33

DOES HIGH PUBLIC DEBT CONSISTENTLY STIFLE ECONOMIC GROWTH? A CRITIQUE OF REINHARTAND ROGOFF

DOES HIGH PUBLIC DEBT CONSISTENTLY STIFLE ECONOMIC GROWTH? A CRITIQUE OF REINHARTAND ROGOFF. THOMAS HERNDON,MICHEAL ASH & ROBERT POLLIN APRIL 15,2013. ABSTARCT.

kailey
Download Presentation

DOES HIGH PUBLIC DEBT CONSISTENTLY STIFLE ECONOMIC GROWTH? A CRITIQUE OF REINHARTAND ROGOFF

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. DOES HIGH PUBLIC DEBT CONSISTENTLY STIFLE ECONOMIC GROWTH?A CRITIQUE OF REINHARTAND ROGOFF THOMAS HERNDON,MICHEAL ASH & ROBERT POLLIN APRIL 15,2013

  2. ABSTARCT • ThisarticlerepeatedReinhartandRogoffandthenfoundthatcodingerrors, selectiveexclusion of available data, andunconventionalweighting of summarystatissticsleadtoseriouserrorsthatinaccuratelyrepresenttherelationshipbetweenpublicdebtand GDP growthamong 20 advancedeconomies in the post-warperiod. • Theaveragereal GDP growth rate forcountriescarrying a pubic-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as published in ReinhartandRogoff. • Alsothisarticleincludestherelationshipbetweenpublicdebtand GDP growtvariessignificantlyby time periodandcountry.

  3. INTRODUCTION • RR’s main result is thatwhereasthe link betweengrowthanddebtseemsrelativelyweak at normal debtlevels, mediangrowthratesforcountrieswithpublicdebtovrrougly 90 percent of GDP areaboutonepercentlowerthanotherwise, growthratesareseveralpercentlower. • RR organizescountry-years in 4 groupsbypublicdebt / GDP ratios ; 0-30%,30-60%, 60-90%, andgreaterthan 90%.

  4. InarticleRR’skeyresults on meanreal GDP growth is collected in Table 1.

  5. Inthiscritique, themostbasicfinding is thatwhenproperlycalculated, theaveragereal GDP growthrteforcountriescarrying a publicdebt-to-GDP ratioover 90% is actually 2.2%, not -0.1% as RR claims. As contraryto RR , average GDP growth at publicdebt/GDP ratiosover 90% is not differentthanwhenpublicdebt/GDP ratiosarelower.

  6. There is onenon-linearity in therelationshipbetweenthelowesttwopublicdept/GDP categories, 0-30& and 30-60%, a rangethat is not relevanttocurrentpolicydebate. • RR has someconclusionthat; at thevery minimum, thiswouldsuggestthattraditionaldebtmanagementissuesshould be at theforefront of publicpolicyconcerns; and in otherworkwhich is aboutreversecausality, thatweakeconomicgrowthmayincreasedebtbyreducingtaxrevenueandincreasingpublicexpenditure.

  7. REPLICATION • RR examines 3 data samples: • 20 advancdeconomiesover 1946-2009 • Thesame 20 economiesoverroughly 200 years • 20 emerging market economies1970-2009 • Inthisarticle, theyfocused on results of RR’s data sample, becausethesehavegeneratedthemostcommonattention.

  8. Inthefirstcasealthoughtheirinitial data aresamewithRR’sspreadsheet, theywere not unabletoreplicatetheresults. Withworkingspreadsheet, theyidentifiedcodingerrors, selectiveexclusion of available data, andunconventionalweighting of summarystatistics.

  9. SelectiveExclusion of Available Data and Data Gaps • RR shows 1946-2009 as theperiod of analysis of the post-waradvancedeconomies, but theyusuallyusethe data whichareavailableforworkingspreadsheet. Besidestherearesomemissingyearsforsomecountries on analysis. Thisleadstosomegapsandoddities in the data. • Forexamplewecan’tfindpublicdebt/GDP valuesfor France for 1973-1978, Austriaexperienced 27.3 and 18.9% real GDP growth in 1948 and 1949 withbothyears in lowerpublic-debtgroups.

  10. MoresignificantareRR’s data exclusionwith 3 othercountries: • Australia (1946-1950) • New Zealand(1946-1949): particularsignificance (90 andabove) • Canada (1946-1950) • Real GDP growthrates in thoeyearswere 7.7,11.9,-9.9, and 10.8. Afterexclusion New Zealandcontributedonlyoneyeartothehighestpublicdebt/GDP category,1951, withreal GDP growth rate of -7.6%.

  11. RR reports 96 country-years in thehighetpublicdebt/GDP category, whereasthisarticlereports 110 country-years. • RR exluded5 yearsforAustralia, 5 yearsforCanada, and 4 years of New Zealandforpublicdebt/GDP. • Infactestimated GDP growth in thehighestpublicdebt/GDP categorywithonly 71 country- years of data: 25 yearsofBelgiumweredropped in additionothers.

  12. SpreadsheetCodingError • A codingerror in RR workingspreadsheetexludes 5 countries; Australia, Austria, Belgium, CanadaandDenmarkwhichareslectedrandomlywithrespecttoeconomicrelationhips. • Thiserror is esponsiblefor a -03% error in RR’spublishedaveragereal GDP growth in thehighestpublicdebt/GDP. • Also in 0-30% categorythiserrorovestatesby 0.1%, and in the30-60% categorythiserrorunderstatesby -0.2%.

  13. UnconventionalWeighting of SummaryStatistics • RR adopt a non-standardweghtingmethodologyformeasuringaveragereal GDP growthwithintheirfourPublcdebt/GDP. RR calculatestheaveragereal GP grothforeachcountrywithinthegroup, a singleaveragevalueforthecountryforalltheyears it appeared in thecategory. • Infact; we can say that not everyadditionalcountry- yearcontributesproportionallyadditionalinfomation. yet equalweighting of countryaveragesentirelyignoresthenumber of yearsthat a cuntryexperienced a highlevel of publicdebtrelativeto GDP.

  14. RR needstojustifythismethodology in detail, it otherwiseaooearsarbitraryandunsupportable. • Table 2 presentsaverageresultsbycountryfortheabove 90% publicdebt/GDP categoryforthealtenativemethods.

  15. Table 2 presentsaverageresutsbycountryfortheabove 90% publicdebt/GDP categoryforthealtenativemethods.

  16. Summary: years, spreadshhet, weightingandtranscription

  17. NON-LINEARUTY AT THE HISTORICAL BOUNDARY • Our revised results also provide an opportunety to re examine non linearity in the relationship between public debt and growth. • First additional public debt/GDPcategory, extending by an additional 30 percentage points of public debt/ gdp ratio that is 90-120 percent and greater than 120 percent categories.

  18. Figure 2 shows the results of the extension. Far from appearing to a break, average real gdp growth in the category of public debt/ gdp between 90 and 120 percent is 2.4percent reasonably close to the 3.2 percent gdp growth in the 60-90 percent category. • GDPgrowth in the new category between 120-150 percent is lower at 1.6 percent but does not fall off a nonlinear cliff. Equally significant as figure 2 shows variation in real gdp growth within each public debt/ gdp category is large.

  19. In figure 3 there is a scatterplot of all of the country-years with continuous real gdp growth plotted against public public debt/ gdp ratio and include a locally fitted regression function. No particular boundary or non linearity is evident in either dimension around public debt/ gdp of 90 percent. • Finally the scatterplot does suggest non liearity in the relationship but that occurs in the change in the public debt/ gdp ratio from 0 to 30 percent.

  20. Figure 4 which is a close up of figure 3 shows more clearly that average growth declines sharply with public debt/ GDPbetween 0 and 30 percent at 0 percent debt/ GDP, average growth is almost 5 percent and by 30 percent it has declined to slightly more than 3 percent. • The relationship between average gdp growth and public debt/ GDPis flat over a wide domain of debt/ GDPvalues. • Between public debt/ GDPration of 38 percent and 117 percent, cannot be reject a null hypothesis that average real gdp growth is 3 percent.

  21. In table 4, • The first row in colums confirms significantly higher growth rates i the lowest 0-30 percent public debt/ GDP • Category relative to other public debt/ GDPcategories. • In the first column above 90 lower… • In the second column above 120 lower… • An f test on the hypothesis that…. Differences are both zero cannot be rejected. • To summarize… non linearity in relationship between gdp growth and public debt between public debt levels 0-30 percent of GDP.

  22. Table 5….presents results… we see that then high GDP growth in the lowest public debt/ GDP category erodes substantially in the shorter more recent periods. • Growth in the middle two public debt/ GDP categories also decelarates with average dropping by more than a percentage point in the samples limited to later years.

  23. Two important conclusion • Eventhe apparent non linearity between the lowest-debt country-years and higher-debt country-years is and historically specific pattern not a robust result across the full time period. • The relationship between public debt and GDP growth is weaker in more recent years relative to the earlier years of sample.

  24. CONCLUSION • RRhas made significant errors in reaching the conclusion that countries facing public debt to GDP ratios above 90 above percent will experience a majordecline in GDP growth. • The full extent of these errors transforms the realty of modestly diminished average GDP growth rates for countries carrying high levels of public debt into a false image that high public debt ratios entail sharp declines in GDP growth.

  25. RRfindings have served as an intellectual bulwark in support of austerity politics. The fact that RRfindings are wrong should therefore lead us to reassess the austerity agenda itself in both EUand US.

  26. IN OUR OPINION • Responsible policy makers must balance the relative costs and benefits of austerity at a time when high unemployment is exacerbating rising inequality, and threatening the social fabric of advanced industrial democracies around the world.

  27. IN OUR OPINION • RR have clearly exerted a major influence in recent years on public policy debates over the management of government debt and fiscal policy more broadly. Their findings have provided significant support for the austerity agenda that has been ascendant in Europe and the UnitedStates since 2010. • They found that public debt has little effect on growth rates until debt reaches 90% of GDP. Growth rates then drop sharply.

More Related