Tuesday, June 4, 2013

For Sussing Out Whether Debt Affects Future Growth, the Key is Carefully Taking into Account Past Growth

On Miles' website we have a companion post to the previous post on an instrumental variables analysis of the RR dataset. In the companion post, we walk through more of the regressions and illustrate how controlling for past growth can erase almost any effect of debt on future growth. The core conclusion?
The two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth for either growth either in the short run (the next five years) or in the long run (as indicated by growth from five to ten years later).
Even though the estimated slopes are still small, we also discuss why this difference -- between small negative and small positive numbers -- matters for policy. For more, be sure to read the full post here.

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