Let me first tell you what Reinhart-Rogoff Result means. In 2010 Carmen Reinhart of University of Marylandand Kenneth Rogoff of Harvard University published a paper in American Economic Review titled ‘Growth in a Time of Debt’ that became a bulwark of theoretical support for austerity policy for the Eurozone.
In this paper Reinhart and Rogoff had concluded based on empirical evidence from forty-four countries and spanning about two hundred years. The dataset incorporated over 3,700 annual observations covering a wide range of political systems, institutions,exchange rate arrangements, and historic circumstances. So it was an irrefutable thesis. The conclusion was : when public debt crosses the threshold of 90% of GDP, the growth rates fall.
Now Thomas Herndon, Michael Ash and Robert Pollin of University of Massachusetts have proved that the Reinhart-Rogoff conclusion was a result of certain errors in the Excel sheet used by them. By typing wrong cell address in the Excel sheet, they accidentally left Denmark, Canada, Belgium, Austria, and Australia out of the average.When Excel error is fixed, a -0.1 % growth rate turns into 0.2 %.
Does that error really mean that Reinhart-Rogoff conclusion is basically wrong and that the austerity policy based on that conclusion is misdirected ?
I would not accept such a proposition. All that it may mean is that the empirical evidence in support of the conclusion is non-existing. But the causal relationship between high debt/GDP ratio and slow growth is irrefutable. One may argue that the relationship is two way : the former causes the latter, and the latter causes the former. That is perfectly plausible. But the two way relationship – what we would call a vicious circle – only reinforces the need for austerity policy.