Fiscal policies pursued by the U.S. and Europe could be called into question after a new study challenged influential research from two Harvard economists which said debt over a certain level was dangerous for countries.
Economists at the University of Massachusetts have released a report that attacks the findings of economists Carmen Reinhart and Kenneth Rogoff, whose 2010 paper "Growth in a Time of Debt" became the driving force for debt reduction and austerity in the developed world.
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According to Reinhart and Rogoff, high levels of debt-to-GDP lead to a long periods of slow growth. Specifically, they said, median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than they would be otherwise. They also said countries with debt above this threshold experienced average real GDP growth of -0.1 percent.
"We replicate Reinhart and Rogoff and find that 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 (gross domestic product) growth among 20 advanced economies in the post-war period," economists Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts said in the report.
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"The average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent," they said.
The new document refutes the relationship between public debt and GDP growth when it reaches above the 90 percent level and adds that there is a "major non-linearity in the relationship" between these two factors.
Reinhart and Rogoff have exerted a major influence in recent years on public policy and the management of government debt. Their research had several high profile advocates including the European Commissioner for Economic and Monetary Affairs Olli Rehn who has cited the 90 percent threshold during key debates about euro zone budgetary tightening.
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Nobel prize-winning economist Paul Krugman has been a major critic of Reinhart and Rogoff's research and on Tuesday he once again jumped into the debate.
"The fact is that when you compare the results head to head, (Reinhart and Rogoff) looks very off," Krugman said on his New York Times blog of the new research published by the University of Massachusetts. "Something went very wrong, and pointing to your other results isn't a good defense."
-By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81
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