Notes on "The Puzzle of Persistently Negative Interest Rate-Growth Differentials; Financial Repression or Income Catch-Up?" (Shabunina, Anna ; Escolano, Julio ; Woo, Jaejoon)

The Puzzle of Persistently Negative Interest Rate-Growth Differentials; Financial Repression or Income Catch-Up?

Shabunina, Anna ; Escolano, Julio ; Woo, Jaejoon

Working Paper Series from RePEc, 2011

The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita.

The differential between the average interest rate paid on government debt and the growth rate of the economy is a key parameter in assessing the sustainability of government debt. This is founded in the logic of debt dynamics: the higher the IRGD, the larger the fiscal effort necessary to place the debt-to-GDP ratio (henceforth the debt ratio) on a downward path, or even to stabilise it.

The actual behaviour of IRGDs in a historical cross-country context encompassing economies of a broad range of income levels has received little attention in the literature.

Negative IRGDs constitute a powerful debt-stabilising force in many non-advanced economies, driving down debt ratios or keeping them stable even in the presence of persistent primary deficits.

non-advanced economies may see their IRGDs increase markedly in the not so distant future - well before their GDP per capita catches up with advanced economies. Rising IRGDs in EMEs could be a relatively fast process, a side effect of financial development and global integration.