Maybe debt doesn’t matter after all

On Saturday I wrote about the paper by Carmen Reinhart and Ken Rogoff about the chilling effect high levels of debt seem to have on economic growth. Now I’m not so sure. David Hendry, the Oxford econometrician who, for his sins, taught me econometrics (actually, he mostly taught me to spot bad econometrics), writes to point out that:

The UK became a dominant world power with [debt/GNP] ratios between 1 and 2; and the UK grew at its fastest when its debt/GNP ratio was highest, not that any causality can be ascribed to that. But essentially there is almost no relationship I can find, having tried over many years, between debt/GNP (or changes etc.) and growth, unemployment, or inflation over 1860-2000. (see Hendry, DF (2009) `Modelling UK Inflation, 1875-1991′, Journal of Applied Econometrics, 16, 255-275; and Castle, JL and Hendry, DF (2009)`The Long-Run Determinants of UK Wages, 1860–2004′, Journal of Macroeconomics, 31, 5-28 ).

Well, this is beyond my pay grade. I’d back Ken Rogoff in a chess match against Hendry any day, but not so sure about the econometrics. One possible objection is that the definition of “high debt” used by Reinhart and Rogoff (90 per cent of GDP) looks a bit arbitrary. Hendry has numerous more technical concerns.

Here are the graphs Hendry sent me for UK debt ratios and economic performance:

Here are Reinhart and Rogoff in their own words. Here is my previous column about David Hendry’s research. Reinhart and Rogoff will hopefully respond; I’ll get to meet Carmen Reinhart at the Royal Economic Society annual meeting soon, and quite possibly David Hendry will be there too.

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
More about Tim: Tim also writes editorials for the FT, presents Radio 4's More or Less and is the author of "The Undercover Economist" and "The Logic of Life".
Comment: To comment, please register with FT.com, which you can do for free here. Please also read our comments policy here.
Contact: Tim's contact address is: economist@ft.com
Time: UK time is shown on posts.
Follow: A link to the blog's RSS feeds is at the top of the page.
Follow on Twitter
FT blogs: See the full range of the FT's blogs here.