DeLong Smackdown Watch: Miles Kimball Says That Kimball and Wang Is Much Stronger than Dube as a Critique of the R-Team...
Apropos of Kimball and Wang…
Miles Kimball writes:
After Crunching Reinhart and Rogoff's Data, We Found No Evidence That High Debt Slows Growth: As I tweeted:
.@delong undersells our results. I would have read Arin Dube’s results alone as saying high debt does slow growth. Of course low growth causes debt in a big way. But we need to know if high debt causes low growth, too. No ev it does!
In tweeting this, I mean,if I were convinced Arin Dube’s left graph were causal, the left graph seems to suggest that higher debt causes low growth in a very important way, though of course not in as big a way as slow growth causes higher debt. If it were causal, the left graph suggests it is the first 30% on the debt to GDP ratio that has the biggest effect on growth, not any 90% threshold. Yichuan and I are saying that the seeming effect of the first 30% on the debt to GDP ratio could be due in important measure to the effect of growth on debt, plus some serial correlation in growth rates. The nonlinearity could come from the fact that it takes quite high growth rates to keep a country from have some significant amounts of debt—as indicated by Arin Dube’s right graph, which is more likely to be primarily causal.
From my perspective, I tend to say that of course high debt causes low growth--if high debt makes people fearful, and leads to low equity valuations and high interest rates. The question is: what happens in the case of high debt when it comes accompanied by low interest rates and high equity values, whether on its own or via financial repression?
Thus I find Kimball and Wang's results a little too strong on the high-debt-doesn't-matter side for me to be entirely comfortable...
