Mercury Rising 鳯女

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More on Reinhart, Rogoff, and whether there is a debt “cliff”

Posted by Charles II on May 9, 2013

Reinhart and Rogoff have re-done their calculations regarding debt and growth:

Setting the noise aside, growth in the high-debt category is less than half of what it averages for the low-debt category. [note: this quote just refers to post-war economies, but their longer data series shows the same effect]

But actually, what this shows is that the noise caused by the details of the model is larger than the effect being studied. Yes, debt reduces growth. But to say that there is a debt “cliff” is indefensible.

More as reaction becomes available, maybe.
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Update: for the record, two other papers on the effects of debt.

Cechetti et al., concluding that above 85% debt/GDP, a 10% increase in debt reduces growth by 1%.

Arcand et al., concluding that when private sector debt exceeds 80-100% of GDP, it begins to impact growth.

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