Friday, February 14, 2014

14/2/2014: Debt & Growth: New IMF Paper


An interesting working paper from the IMF, worth further digesting and blogging: "Debt and Growth: Is There a Magic Threshold?" by Andrea Pescatori, Damiano Sandri, and John Simon (IMF Working Paper WP/14/34, February 2014: http://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf)

Per abstract (emphasis is mine): "Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised."

"Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as 
countries with lower debt."

"Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility."

As I noted above: needs more reading and blogging. Generally, before dealing with the paper in details, this appears to contradict Reinhart & Rogoff (2010) paper and several subsequent papers (on slowdown in growth conclusions) and support a number of papers finding inconclusive evidence. Note another caveat: absence of evidence is not evidence of absence.

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