Mark Thoma — Growth and Sovereign Debt: What Causes What?

Reinhart and Rogoff are back in the news lately as a standard of comparison for data errors (is what Piketty did as bad...?).

But they wouldn't have been forgotten in any case. This research reexamines the Reinhart and Rogoff findings, and concludes that high public debt does not cause low growth. It's the other way around, low growth brings about high debt:...

Even if a negative correlation between debt and growth seems undisputed, this does not imply that debt is harmful for growth, since correlation does not always imply causation. In fact, Reinhart and Rogoff (2010b) have emphasised the possible bi-directional causality between debt and growth. They argue that high debt may lead to higher taxes and/or lower government expenditure, which is harmful for economic growth, while on the other hand periods of low growth may lead to high deficits and accumulation of debt. Nevertheless, these hypotheses are not backed by a quantitative analysis to establish the relative size and significance of each direction. To decompose the correlation into cause and effect, we apply Vector Autoregressive (VAR) models. Our main result is that debt does not seem to have any significant impact on growth.

Economist's View
Growth and Sovereign Debt: What Causes What?
Mark Thoma | Professor of Economics, University of Oregon