Rogoff, Reinhart and Ricardian Equivalence

The largest economics controversy of the year belonged to Ken Rogoff and Carmen Reinhart for their research describing the relationship between economic growth and government debt. Their research, based on their popular book looking at the striking similarities between recurring booms and busts, argued that there is a critical level of debt above which economic growth is compromised (Rogoff and Reinhart 2009, 2010). Loosely stated, they argued that government debt above 90 percent of a country´s GDP is harmful to economic growth.

Earlier this year this conclusion was brought into disrepute when a review article argued that Rogoff and Reinhart’s study was plagued by “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” (Herndon, Ash and Pollin 2013).

In the melee that ensued there was a critical point all but lost. There is a relationship between debt and growth, and whether Reinhart and Rogoff massaged their numbers to get the result in question is of only secondary importance.

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David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute’s Douglas E. French Prize. Send him mail.