Meet the 28-Year-Old Grad Student Who Just Shook the Global Austerity Movement

[Jim__]

43. Here's a link to Herndon's very readable paper.

Link

An excerpt:

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RR adopts a non-standard weighting methodology for measuring average real GDP growth
within their four public debt/GDP categories. After assigning each country-year to one of
four public debt/GDP groups, RR calculates the average real GDP growth for each country
within the group, that is, a single average value for the country for all the years it appeared
in the category. For example, real GDP growth in the UK averaged 2.4 percent per year
during the 19 years that the UK appeared in the highest public debt/GDP category while
real GDP growth for the US averaged -2.0 percent per year during the 4 years that the
US appeared in the highest category. The country averages within each group were then
averaged, equally weighted by country, to calculate the average real GDP growth rate within
each public debt/GDP grouping.

RR does not indicate or discuss the decision to weight equally by country rather than by
country-year. In fact, possible within-country serially correlated relationships could support
an argument that not every additional country-year contributes proportionally additional
information. Yet equal weighting of country averages entirely ignores the number of years
that a country experienced a high level of public debt relative to GDP. Thus, the existence
of serial correlation could mean that, with Greece and the UK, 19 years carrying a public
debt/GDP load over 90 percent and averaging 2.9 percent and 2.4 percent GDP growth
respectively do not each warrant 19 times the weight as New Zealand's single year at -7.6
percent GDP growth or fivve times the weight as the US's four years with an average of -2.0
percent GDP growth. But equal weighting by country gives a one-year episode as much
weight as nearly two decades in the above 90 percent public debt/GDP range. RR needs to
justify this methodology in detail. It otherwise appears arbitrary and unsupportable.

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