Wednesday, April 17, 2013

My take on Reinhart-Rogoff

I have not blogged for a while, but this is too important to ignore, mostly because for the past two years or so I have been supervising different groups of undergraduate students on a data-driven project based on reproducing and extending the results in the Reinhart-Rogoff book.

So let me start with a few observations about the book:

- the dataset used in the book is not readily available, despite what the authors say. What one can download from their website is secondary data prepared by the authors, for example the full set of crises dates for each country. On the other hand, the book does provide a more or less complete list of sources, from which we were able to download something like 95% of the primary data used by the authors (e.g from places like the IMF, World Bank, the Madison project, etc).

- the books is full of small errors, like figures that do not quite match what their caption says, or numerical results that turned out to be slightly wrong when we tried to reproduced them based on the primary data, but overall we didn't find any major errors and agreed with almost all of their conclusions. Moreover, we were able to successfully implement the signals approach described towards the end of the book for currency, banking, and stock market crisis (not mentioned in the book!).

- in other words, the book is both solid and a useful launchpad for further research, if only a little sloppy.

Now, the story is very different (pun intended!) regarding their 2010 paper. Right from the beginning I thought that the possibility of reverse causation alone was enough reason not to take the results too seriously, so I didn't even bothered to try to reproduce the results.

But alas, HAP have done the work and found that even the numerical results presented in the paper were significantly wrong, not to mention the conclusions. And the response from Carmem Reinhart is even more appalling than the article itself. Basically she claims that HAP also find a negative correlation between debt and growth, so what's the big deal?

Of course the big deal is that their original paper implied the existence of a hard threshold at 90% debt-to-GDP beyond which the slowdown in growth was very rapid, indicating some kind of nonlinear amplifying effects that would likely plunge the country into a state of crisis. But as it turns out, there's nothing special about the 90% mark, with the relationship being approximately linear all the way through, and therefore very manageable.

In any case, I wish they had never written the 2010 paper (and perhaps by now they wish the same), if only because it's probably going to drag their good and useful book (along with their reputation in general) through the well-deserved mud where they find themselves at the moment.