UCD Debt-to-GDP Ratio Discussion


Read the NY Times article on the Reinhardt Rugoff paper. What was the issue and why did it happen?

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The main argument in this article is whether the rise in government debt is related to the decline in economic growth and what is the cause and effect. Another question that
emerges from this is whether governments should avoid withdrawing fiscal stimulus too quickly, which could easily tilt the economy back into recession.
Reinhart and Rogoff are the representatives who believes that rising debt levels have much to do with falling economic growth. Their report indicated that countries with high
levels of debt-specifically, those with debt-to-G.D.P. ratios of more than ninety percent-grow much more slowly. Therefore, they identified the threshold as a debt-to-G.D.P.
ratio of ninety per cent. Once debt rose above that level, they said, the average growth rate was negative 0.1 per cent.
However, the naysayers, the economists from the University of Massachusetts, Amherst, pointed out that R&R had made some data omissions, questionable methods of
weighting, and elementary coding errors in their original work. These ecnomists came up with a figure of positive 2.2 per cent for average growth in countries with a debt-to-
G.D.P. ratio of ninety per cent or more. There are certain rules between the two, but the threshold is by no means 90%, and their causal relationship is very complex, not
simply one side caused the other side, but mutual influence.
The reason for this debate is that although R&R found some trends in debt and economic development, they pushed the argument too far, and policymakers who wanted to
use this conclusion to push some policies have taken a narrow view of the issue. Economics proceeds via hypothesis and empirical testing, and any so-called fixed law is
unstable and conditional. We should use these reaserches to identify general tendencies and carefully consider whether they really fit the situation.
Two economists published an article “Growth in a Time of Debt”. They claimed that economic growth was lower greatly when a country’s gross public debt equaled or
greater than 90 percent of its GDP. However, they got critics from other economists. First, they have spreadsheet calculation errors that affected their calculations of
growth rates for big economies since World War II. Second, they were accused of two other errors –selective exclusion of available data” and “unconventional weighting
of summary statistics.”
Actually, there is no evidence in these most recent years for any drop-off at all in economic growth when public debt exceeds 90 percent of G.D.P. Robert Pollin and
Michael Ash stated that the median growth figures Reinhart and Rogoff reported in the 2010 paper are distorted by the same coding error and partial exclusion of data
from Australia, Canada, and New Zealand that tainted the average growth figures. However, politicians take advantage of the previous conclusion to call for severe cuts
in government budgets and services, layoffs of public-sector employees, and tax increases. Sometimes, the politicians may mistakenly understand the conclusion and
exaggerate the effect. Therefore, it is better to read the original research paper to fully understand the statement. The reliability and validity of the data are significant
which affects the calculation and conclusion. Thus, we need to make sure the source of the data is reliable and check the calculation.

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Explanation & Answer:
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DebttoGDP Ratio

Reinhardt Rugoff

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