Mark Sadowski continues to provide excellent comments:
Here is Krugman’s latest:
“…First, nominal wage stickiness — the key argument for the virtues of floating exchange rates — is an overwhelmingly demonstrated fact. Rose doesn’t offer reasons why this doesn’t matter; he just offers a reduced-form relationship between currency regimes and economic performance, and fails to find a significant effect. Is this because there really is no effect, or because his tests lack power?
Second, there is the very striking empirical observation that debt levels matter much less for countries with their own currency than for those without. Here’s one view of the relationship between debt levels and borrowing costs (data from Greenlaw et al):
And here’s another view of the same data, with euro members identified:
It sure looks as if debt matters only for those on the euro, doesn’t it? For what it’s worth, here’s a regression of interest rates on debt that uses a dummy for euro membership, and allows an interaction between that dummy and debt:
Indeed: debt only seems to matter for euro nations…”
So, four days ago Krugman posted a scatterplot in which the two thirds of the nations are eurozone members, igoring the effects of currency regime, in order to make the argument that fiscal policy matters at the zero lower bound. Today he posts another scatterplot in which a majority of the nations are eurozone members, but this time he literally highlights the currency regime, and tests for the effects of interaction, in order to make the argument that debt matters much less for countries with their own currency.
The fact that his previous post was the intellectual equivalent of Greenlaw et al, purporting to show a relationship through the use of a scatterplot consisting mostly of eurozone members without any recognition at all that the relationship is entirely driven by the fact that these nations do not have an independent monetary policy, seems to have completely escaped his notice.
Kevin Erdmann has some excellent new posts (here and here) that look at the causes of austerity, and how the effects depend on whether countries have an independent monetary policy. There doesn’t seem to be any statistically significant relationship among countries with independent monetary policy. My hunch is that a large enough study would show a significant relationship, but probably at least partly as a result of misidentification of “austerity.”