by Dirk Ehnts, Econoblog101
Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics.
So, Reinhart/Rogoff, part II? In order to think about that one would have to take the paper seriously. I can’t do that since one of the authors has absolutely discredited himself. He has a right to voice his opinion, but I am not going to discuss his work anymore. Obviously, it is to justify cuts in government spending by some abstract econometric voodoo.
As in Reinhart/Rogoff, there is no theoretical model. The US government can get US-dollar reserves as deposits at the FED, and these it can spend. There has been no shift in the interest rate yet, bond vigilantes apparently have been an invention.
Of course, in Europe it would be different because these countries are indebted in foreign currency (euros), much unlike the US which is indebted in dollars, which the FED can and does produce. Nevertheless, the authors of the NBER paper include countries like Greece, Ireland, Spain and other euro zone countries in their study (Table 3.2). However, as I said, I am not going to discuss the work of Frederic Mishkin. Here is why: