Tuesday, 23 April 2013

Another Rogoff mistake.

Another flaw in Rogoff’s work was to include EZ countries in his study.
If an EZ country becomes uncompetitive and gets too far into debt, it can only escape via several years of austerity, i.e. poor economic growth. And that of course tends to support the Rogoff claim that high debt results in poor economic growth.
In contrast, for a country which issues its own currency there is no need for any significant austerity: that country can regain competitiveness by simply devaluing. There is of course SOME AUSTERITY involved in devaluation: the costs of the relevant country’s imports rise. But the degree of austerity is far less.
AS IT HAPPENS, the above mistake probably didn’t influence Rogoff’s results because his study did not cover the period during which EZ periphery countries’ debts skyrocketed (although private debts WERE HIGH).
Nevertheless, in Rogoff type studies it’s a bit of a nonsense to mix up monetarily sovereign countries with EZ countries.

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