Posted by: Dirk | April 17, 2013

Reinhart. Rogoff. Wrong.

This is a major scandal of economists finding a result which does not hold under closer scrutiny. Back in 2010, which is just the year that European austerity policies were put into place, the authors published a paper at the National Bureau of Economic Research named Growth in a Time of Debt. Here is the abstract (my highlighting):

We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.

So, if you increase your government debt above the magical 90% it would make the median (not average!) economy grow slower/shrink by a percentage point. The result drew criticism back then from Paul Krugman and others. Now, a new study was published that looks into the data (again, my highlighting):

Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff

Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff ’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

Apparently, the exclusion of data from New Zealand helped to produce the original findings of Reinhart and Rogoff, as CEPR reports:

In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff. But it was the initial R&R papers that created the framework for most of the subsequent policy debate. And HAP has shown that the key finding that debt slows growth was driven overwhelmingly by the exclusion of 4 years of data from New Zealand.

And this is once more proof that the economics discipline has a big, a very big problem. Since everybody knows that the papers and books of economists are influencing policy debates, politicians and other groups will try to influence economists. Of course, one article does not lead to policies being enacted, but it can be a very good excuse to hide behind. The fall of Reinhart-Rogoff should lead to two things: first, a debate about why again we are using austerity policies if they are disastrous in reality and now even the empirical data says they would, and secondly, a new debate about the role of the economists and the way the are chosen. After all, they all seem to have read Reinhart-Rogoff and fell for it. Actually, where Reinhart-Rogoff speak of relationship, the following economists think a causality exists from high debt loads to more severe debt problems. So, have a look at this question given to economists:

Countries that let their debt loads get high risk losing control of their own fiscal sustainability, through an adverse feedback loop in which doubts by lenders lead to higher government bond rates, which in turn make debt problems more severe.

87% of economists asked said agree or strong agree, some with 10/10 confidence. So, if you think that economists should be humble AND/OR know stuff about the economy I suggest you ignore those economists who were wrong AND gave 10/10 confidence. Their names are:

  • Daron Acemoglu
  • Darrell Duffie
  • Aaron Edlin
  • Maurice Obstfeld
  • Nancy Stokey

By the way: I have attacked Rogoff’s “interest rate puzzle” earlier this months in this post. He did not strike me as a knowledgable economist. Apparently, he did not read a single line of Keynes ever. Not that you cannot become an excellent economist without. But you should have developed some concept which at least resembles the Keynesian liquidity trap idea.



  1. […] the Reinhart/Rogoff scandal where the authors of an empirical study blocked other economists from using the data set until the […]

  2. […] and executors of Europe’s austerity policy. This is a very good idea, since it was based on thin empirical and weak theoretical grounds from the very start. The idea is refuted by the IS/LM model, which is […]

  3. […] a free lunch. It is now clear why the neo-classical DSGE community invested some much work into “proving” that reality features falling fiscal multiplicators. If it would not, then expanding government […]

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