Krugman vs Iceland; Krugman Vs. Estonia

The Krugman Vs. Battles go on.

There was some stirring discussion on Krugman’s analysis on Iceland. CFR Blog pointed Krugman used wrong analysis to justify having your own currency helps. Arvind Subramanian helps understand the debate.His verdict:

the bottom line from the table is this: On a PPP-based calculation, the Baltic republics have done better than what they should have, given that they started off poorer than Iceland (the numbers in column 1 exceed those in column 3 for all the three Baltic countries). On a market-exchange rate based calculation, however, they have done worse (growth numbers in column 1 are smaller than in column 2 for all three Baltic countries).

My conclusions are:

  1. CFR was wrong in presenting the numbers for medium-term growth the way they did.
  2. Ryan Avent and Paul Krugman were right in drawing attention to CFR’s mistake.
  3. However, Ryan Avent (and Krugman) did not emphasize that even from a medium-term perspective, the relevant comparison should relate to per capita GDP growth rates—not overall GDP growth rates.
  4. If one takes account of the convergence effect, the performance of the Baltic countries was neither significantly better than Iceland’s (as CFR implied) nor significantly worse (as Ryan Avent implied). Paul Krugman, unlike Ryan Avent, did not take a view on medium-term performance. 

Not sure whether this is the final word..

Now on Estonia. BW has an article showing how Estonian policymakers did not take kindly to Krugman’s criticism of Estonia policies of internal devaluation. Krugman responds saying he is hated in Estonia.

Debate to continue for a long time..

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