Ralph Musgrave — What's The Optimum Debt/GDP Ratio, And What's The Optimum Interest To Pay On That Debt?

Summary

This article deals with the differences between Modern Monetary Theory and what Simon Wren-Lewis (Oxford economics prof.) calls the "consensus assignment" (which more or less equals the conventional wisdom).

I argue below that if the best of MMT and the best of SW-L's ideas are combined, one ends with the ideal system and that involves two important elements. First, it results in a national debt that pays the optimum rate of interest: zero or near zero. Second, it results in the optimum debt/GDP ratio. But since the interest on that debt is zero or near zero that so-called debt isn't really debt at all: it's more like money (base money to be exact).
Martin Wolf pointed to the similarities between "low-interest national debt" and money.

And Milton Friedman supported the "zero interest" idea. Moreover, at a near-zero interest rate, government is, by definition, not influencing or interfering with the free market rate of interest, i.e. a genuine free market rate of interest is obtained under the above "ideal" system, and that presumably maximises GDP.

Seeking Alpha
What's The Optimum Debt/GDP Ratio, And What's The Optimum Interest To Pay On That Debt?

Ralph Musgrave

Robert Pollin — Public debt, GDP growth, and austerity: why Reinhart and Rogoff are wrong

Burying R & R deeper.

And still no discussion of differences in historical context, such as fixed versus floating exchange rates.

LSE
Public debt, GDP growth, and austerity: why Reinhart and Rogoff are wrong
Robert Pollin | Distinguished Professor of Economics at the University of Massachusetts-Amherst and Co-Director of the Political Economy Research Institute (PERI)
(h/t Brad DeLong)

Randy Wray — New IMF Paper Shows Yet Again that Reinhart and Rogoff Results Are Erroneous

I’m pretty sure that the Reinhart and Rogoff “study” is the worst empirical research ever undertaken.... Their work was ideologically-driven: they wanted to stoke the deficit hysteria used as a justification for austerity....

A new IMF paper, “Debt and Growth: Is There a Magic Threshold?” by Andrea Pescatori, Damiano Sandri, and John Simon ... does a pretty good job of laying out the issues without the ideological bias of R&R. The authors use a data set that is less questionable, focusing on IMF member nations with data back to 1875. To take account of the possibility of reverse causation (slow growth leads to higher debt ratios), they look at longer periods of correlation. In other words, they see if high debt ratios (say, above 90%) remain associated with slow growth for years into the future. In addition, they distinguish between trajectories (does a country with a high debt ratio have a rising or falling debt ratio) to see if that makes a difference for the correlation. They also do some adjustments for “outliers” that affect averages (note that the R&R results depended strongly on outliers as well as math errors they made in their calculations).

What they find is that there is no “magic threshold” for the public debt ratio beyond which growth suffers. So far as their study goes, I think what they’ve done is a model for honest empirical work. Here is a quick summary of the main findings:

Economonitor — Great Leap Forward

New IMF Paper Shows Yet Again that Reinhart and Rogoff Results Are Erroneous
L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Mark Gongloff — 2 More [UMKC] Grad Students Claim To Find Another Flaw In Reinhart-Rogoff Research

Woo hoo!

First, University of Massachusetts-Amherst grad student Thomas Herndon shot holes in their influential research paper, "Growth In A Time Of Debt," by pointing out several mistakes and omissions the Harvard economists had made. Now, two PhD students at the University of Missouri-Kansas City have a new paper that they say finds another flaw in that same research.

The students argue that Reinhart and Rogoff's paper leaned too heavily on data from one country, Japan, leading to all sorts of bad conclusions about the relationship between government debt and economic growth.

"The argument that high ratios of government debt-to-GDP cause low growth remains plagued by misconceptions, at least for nations which issue their own currency," wrote the UMKC students, Matthew Berg and Brian Hartley. They used the same data that Herndon used, correcting for Reinhart and Rogoff's earlier errors and omissions.

Berg and Hartley argued that, once you adjust for the outsize influence of Japan on the data, there is no evidence that high debt causes slow growth, as Reinhart and Rogoff strongly suggested in their original paper and in subsequent influential op-ed pieces. In fact, there is some evidence that the chain of events may work in the other direction, with slow growth leading to higher debt, Berg and Hartley wrote.

The Huffington Post
2 More [UMKC] Grad Students Claim To Find Another Flaw In Reinhart-Rogoff Research
Mark Gongloff

Ann Pettifor and Jeremy Smith — A modest test for debt/GDP in the UK postwar experience

Our mini-research on the UK’s postwar experience, is a modest test of the debt-austerity “thesis”. Using International Monetary Fund and Office for National Statistics numbers for 1949-2011, we found that UK gross domestic product increased at its fastest average rate – by 3.19 per cent – during the 18-year period (1949-66) when the debt-to-GDP ratio was more than 90 per cent (and mostly way over 100 per cent). This compares with an average of 2.60 per cent for the 36 years when the ratio lies between 30 and 60 per cent. For the other nine years (60 to 90 per cent), the average is 1.93 per cent.

What is more, during the 18 years when the debt-to-GDP ratio was more than 90 per cent, that ratio fell every year without exception. We do not, of course, seek to argue from this that a high debt-to-GDP ratio leads to, or is associated with, higher growth. We simply note that increased economic activity will tend to shrink the debt-to-GDP ratio, while falls in economic activity tend to increase it.

DEBTonation
A letter to the FT: A modest test for debt/GDP in the UK postwar experience
Ann Pettifor and Jeremy Smith | Directors, Policy Research in Macroeconomics, London