Value Investing World

Wednesday, April 17, 2013

Reinhart-Rogoff recrunch the numbers

Carmen Reinhart and Ken Rogoff have had a bad day. The two economic historians’ research, which implied that public debt overhangs can hamper economic growth, was perhaps one of the most cited pieces of work in recent years. Their advice that high debt-GDP ratios – particularly above 90 per cent – are harmful to growth, has become a widely used point in discussion. And it’s under attack by a trio at the University of Massachusetts, Amherst – Thomas Herndon, Michael Ash, and Robert Pollin.

As FT Alphaville has noted, the issue is about one of Reinhart and Rogoff’s most heavily cited papers on the importance of debt. This paper has been accused of being the victim of fat-fingered Excel coding, as well as selective use of data and odd weighting of how different episodes are weighted, which seemed – to the authors – to make little sense. [UPDATE, 14:46 GMT - Pollin and Ash have written a piece for the FT on what they think this all means for austerity here.]

Robin Harding posted Reinhart and Rogoff’s original reply here. Overnight, the authors have worked through the numbers – and have put up a pretty robust defence of their work. They do admit the first error – there was an Excel blunder:

Posted by Joe at 4/17/2013
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Value Investing World is a blog dedicated to promoting the multidisciplinary approach to investing and development of – as Charlie Munger describes it – a latticework of mental models. Although largely focused on linking to investing and economic material it deems of interest, it will also post and link to material from other disciplines that it thinks worth reading or watching.

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