Thursday, February 26, 2015

Structural deficits and growth in Europe

I use the interest expense on government debt as a percent of GDP and match it with growth numbers picked from Krugman's austerity chart.

We a straight shot, the more structural deficit, the less growth.



Are interest expenses a measure of structural deficit? Sure, why not, they are a market computed cost of borrowing to pay for the deficit. So how does Krugman come up with this chart:


He uses changes in structural deficit, over the four year period.  But changes in structural deficit are not orthogonal to growth, the two will be a mixed variable. Interest expense will separate out the components using price discovery.






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