Posted Content•
Growth in a Time of Debt
TL;DR: This paper study the relationship between government debt and real GDP growth and find that the relationship is weak for debt/GDP ratios below a threshold of 90 percent of GDP, while for higher levels, growth rates are roughly cut in half.
Abstract: 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.
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TL;DR: In this paper, the authors developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises, and they test three related hypotheses at both world aggregate levels and on an individual country basis.
Abstract: Newly developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises. We test three related hypotheses at both “world” aggregate levels and on an individual country basis. First, external debt surges are an antecedent to banking crises. Second, banking crises (domestic and those in financial centers) often precede or accompany sovereign debt crises; we find they help predict them. Third, public borrowing surges ahead of external sovereign default, as governments have “hidden domestic debts” that exceed the better documented levels of external debt.
1,442 citations
TL;DR: This paper replicated Reinhart and Rogoff (2010A and 2010B) and found that selective exclusion of available data, coding errors and inappropriate weighting of summary statistics lead to serious miscalculations that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies.
Abstract: We replicate Reinhart and Rogoff (2010A and 2010B) and find that selective exclusion of available data, coding errors and inappropriate weighting of summary statistics lead to serious miscalculations that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies Over 1946–2009, countries with public debt/GDP ratios above 90% averaged 22% real annual GDP growth, not −01% as published The published results for (i) median GDP growth rates for the 1946–2009 period and (ii) mean and median GDP growth figures over 1790–2009 are all distorted by similar methodological errors, although the magnitudes of the distortions are somewhat smaller than with the mean figures for 1946–2009 Contrary to Reinhart and Rogoff’s broader contentions, both mean and median GDP growth when public debt levels exceed 90% of GDP are not dramatically different from when the public debt/GDP ratios are lower The relationship between public debt and GDP growth varies significantly by period and country Our overall evidence refutes RR’s claim that public debt/GDP ratios above 90% consistently reduce a country’s GDP growth
886 citations
TL;DR: The origin and propagation of the European sovereign debt crisis can be attributed to the flawed original design of the euro as discussed by the authors, and there was an incomplete understanding of the fragility of a monetary union under crisis conditions, especially in the absence of banking union and other European-level buffer mechanisms.
Abstract: The origin and propagation of the European sovereign debt crisis can be attributed to the flawed original design of the euro. In particular, there was an incomplete understanding of the fragility of a monetary union under crisis conditions, especially in the absence of banking union and other European-level buffer mechanisms. Moreover, the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis. After diagnosing the situation, we consider reforms that might improve the resilience of the euro area to future fiscal shocks.
839 citations
TL;DR: A comprehensive overview of a broad spectrum of fault localization techniques, each of which aims to streamline the fault localization process and make it more effective by attacking the problem in a unique way is provided.
Abstract: Software fault localization, the act of identifying the locations of faults in a program, is widely recognized to be one of the most tedious, time consuming, and expensive – yet equally critical – activities in program debugging. Due to the increasing scale and complexity of software today, manually locating faults when failures occur is rapidly becoming infeasible, and consequently, there is a strong demand for techniques that can guide software developers to the locations of faults in a program with minimal human intervention. This demand in turn has fueled the proposal and development of a broad spectrum of fault localization techniques, each of which aims to streamline the fault localization process and make it more effective by attacking the problem in a unique way. In this article, we catalog and provide a comprehensive overview of such techniques and discuss key issues and concerns that are pertinent to software fault localization as a whole.
822 citations
Journal Article•
TL;DR: In this paper, the authors used a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010, and found that, beyond a certain level, debt is a drag on growth.
Abstract: At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.
593 citations
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TL;DR: This Time Is Different as mentioned in this paper presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes.
Abstract: Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.
4,595 citations
"Growth in a Time of Debt" refers background in this paper
...Sources: International Monetary Fund, world Economic Outlook, OECD, World Bank, Global Development finance, and Reinhart and Rogoff (2009b) and sources cited therein....
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...Sources: historical Statistics of the United States, Flow of Funds, Board of Governors of the Federal Reserve, International Monetary Fund, world Economic Outlook, OECD, World Bank, Global Development finance, and Reinhart and Rogoff (2009b) and sources cited therein....
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...As Reinhart and Rogoff (2009b) emphasize and numerous models suggest, countries that choose to rely excessively on short-term borrowing to fund growing debt levels are particularly vulnerable to crises in confidence that can provoke very sudden and “unexpected” financial crises....
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...Sources: International Monetary Fund, world Economic Outlook, World Bank, Global Development finance, and Reinhart and Rogoff (2009b) and sources cited therein....
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...For a complete listing of sources for government debt, see Reinhart and Rogoff (2009b)....
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TL;DR: In this paper, a public debt theory is constructed in which the Ricardian invariance theorem is valid as a first-order proposition but where the dependence excess burden on the timing of taxation implies an optimal time path of debt issue.
Abstract: A public debt theory is constructed in which the Ricardian invariance theorem is valid as a first-order proposition but where the dependence excess burden on the timing of taxation implies an optimal time path of debt issue. A central proposition is that deficits are varied in order to maintain expected constancy in tax rates. This behavior implies a positive effect on debt issue of temporary increases in government spending (as in wartime), a countercyclical response of debt to temporary income movements, and a one-to-one effect of expected inflation on nominal debt growth. Debt issue would be invariant with the outstanding debt-income ratio and, except for a mirror effect, with the level of government spending. Hypotheses are tested on U.S. data since World War I. Results are basically in accord with the theory. It also turns out that a small set of explanatory variables can account for the principal movements in interest-bearing federal debt since the 1920s.
3,112 citations
TL;DR: In this paper, the authors developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises, and they test three related hypotheses at both world aggregate levels and on an individual country basis.
Abstract: Newly developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises. We test three related hypotheses at both “world” aggregate levels and on an individual country basis. First, external debt surges are an antecedent to banking crises. Second, banking crises (domestic and those in financial centers) often precede or accompany sovereign debt crises; we find they help predict them. Third, public borrowing surges ahead of external sovereign default, as governments have “hidden domestic debts” that exceed the better documented levels of external debt.
1,442 citations
TL;DR: A year ago, this paper presented a historical analysis comparing the run-up to the 2007 US subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II (Reinhart and Rogoff 2008a ).
Abstract: A year ago, we presented a historical analysis comparing the run-up to the 2007 US subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II (Reinhart and Rogoff 2008a ). We showed that standard indicators for the United States, such as asset price inflation, rising lever age, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis—indeed, a severe one. In this paper, we engage in a similar com
942 citations
Posted Content•
TL;DR: The authors use a stochastic ability-to-pay model of sovereign default in which risk-neutral investors lend to a government that displays "fiscal fatigue," because its ability to increase primary balances cannot keep pace with rising debt.
Abstract: How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic ability-to-pay model of sovereign default in which risk-neutral investors lend to a government that displays "fiscal fatigue," because its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled-over. Using data for 23 advanced economies over 1970-2007, we find evidence of a fiscal reaction function with these features, and use it to compute "fiscal space," defined as the difference between projected debt ratios and debt limits.
408 citations