I’ve stayed out of the R&R kerfuffle. This is partly because I haven’t read their paper, partly because James Hamilton points out that the mistakes were fairly minor, and partly because Matt Yglesias points out that the real issue is causality, which R&R’s study doesn’t resolve.
While I’ve ignored the R&R study on public debt, I’ve had issues with their claim that financial crises tend to be followed by slow recoveries. That’s probably true, but we need to be careful before assuming any causal relationship. I’m inclined to think that most financial crises are caused by a sharp drop in expected GDP growth. If the shock is nominal, as in the US in 1930s and in Argentina in the 1998-2001 period, then monetary stimulus can trigger fast RGDP growth. If the shock is real (say Indonesia in 1998), then a slow recovery is almost inevitable. Expectations of slow NGDP growth can easily trigger a financial crisis, so causation can go in either direction. Indeed the EMH implies that a sharp fall in asset prices will accompany the early stages of a deep and prolonged and unexpected slump in GDP growth. Unfortunately, the R&R study led to excessive pessimism about the prospects for monetary stimulus leading to a fast US recovery, and many pundits missed the fact that our case was more like the US in 1933 and Argentina in 2001, than Indonesia in 1998.
James Hamilton recently noted that Paul Krugman is (was?) a huge admirer of R&R’s research. Here’s Krugman in 2010:
Regular readers will know that I’m a huge admirer of Ken’s work, both theoretical and empirical. Obstfeld and Rogoff is the definitive work on New Keynesian open-economy macro; Reinhart and Rogoff the definitive empirical history of financial crises and their aftermath. It was largely thanks to my study of Obstfeld-Rogoff that I realized, from the get-go, that many of the arguments we were hearing about how modern macro had proved Keynesianism wrong were just ignorant; it was largely thanks to my reading of Reinhart-Rogoff that I realized, early in the game, that this was going to be a prolonged slump rather than a V-shaped recovery.
Hamilton also noted that R&R have been far more accurate in their predictions of the eurozone debt crisis than Krugman, who pooh-poohed the notion of a widespread sovereign debt crisis in 2009. I notice that Krugman has now begun using phrases like “garbage-in, garbage out” to describe the quality of Rogoff and Reinhart’s empirical research. (OK, he doesn’t mention their name, but does anyone doubt which paper he is referring to.
PS. Yes, I will eventually do a post without mentioning the Great White Whale. But not just yet.
PPS. I disagree with Hamilton and agree with Krugman on one point—US interest rates are likely to stay very low for longer than most people realize.