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IMF paper slams Reinhart-Rogoff

A new report commissioned by the International Monetary Fund (IMF) has refuted claims made by Harvard economists Carmen Reinhart and Kenneth Rogoff that high government debt levels stifle economic growth.

The new research released on Thursday by IMF researchers Andrea Pescatori, Damiano Sandri and John Simon states that they find no evidence that there is any particular debt threshold above which medium-term growth prospects are dramatically compromised.

"We find no evidence of threshold effects over any but the shortest-term horizons....the remaining relationship between debt and growth is relatively muted and the magnitude is much smaller than the dramatic figures suggested in earlier studies," the three economists said in the report.

(Read More: 1930s-style debt defaults likely, says IMF research)

"Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt."

In 2010, an academic paper called "Growth in a Time of Debt" released by Reinhart and Rogoff argued that there is a threshold effect, meaning debt above 90 percent of a country's GDP (gross domestic product) is associated with dramatically worse growth outcomes.

Their research is frequently cited as one of the inspirations for austerity measures, with high-profile advocates including the Olli Rehn, the European Union's Commissioner for Economic and Monetary Affairs, citing it during key debates about the need for euro zone budgetary tightening.

In April 2013, "Growth in a Time of Debt" came under attack from an economics doctoral student and two professors at the University of Massachusetts who claimed it contained a mathematical error. Reinhart and Rogoff responded three times to the research paper, accepting the error but rebutting allegations that the error stemmed from "selective exclusion" and explained that it didn't change the key theme of their research.

(Read More: Reinhart-Rogoff Error Sparks Austerity Debate)

Pedro Armestre/Stringer | AFP

Thursday's paper firmly belongs to the opposing camp, attempting to throw cold water on Reinhart and Rogoff's claims. It also advances the view that the priority for governments should be increasing growth rather than reducing debt and, consequently, that much less short-term fiscal austerity is appropriate.

Using a different way of analyzing the data and a sizeable dataset, the IMF paper says that the association between debt and medium-term growth becomes rather weak at high levels of debt. Countries with high but declining levels of debt have historically grown just as fast as their peers, it adds.

The paper is not without its warnings, however. It concedes that it still doesn't establish what the underlying structural relationship between debt and growth is. It also states that high levels of debt are weakly associated with higher output volatility which would suggest an association with market pressure or fiscal and monetary policy actions that could destabilize growth.

(Read More: Reinhart, Rogoff: Austerity Is Not the Only Answer)

"The fact that there is no clear debt threshold that severely impairs medium term growth should not, however, be interpreted as a conclusion that debt does not matter," the report said.

"For example, we have found some evidence that higher debt appears to be associated with more volatile growth. And volatile growth can still be damaging to economic welfare."

By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81

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