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

Anna Shabunina, Julio Escolano and Jaejoon Woo

No 2011/260, IMF Working Papers from International Monetary Fund

Abstract: The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita. It has been on average around 1 percentage point for large advanced economies during 1999-2008; but below -7 percentage points among non-advanced economies - exerting a powerful stabilizing influence on government debt ratios. We show that large negative IRGDs are largely due to real interest rates well below market equilibrium - possibly stemming from financial repression and captive and distorted markets, whereas the income catch-up process plays a relatively modest role. We find econometric support for this conjecture. Therefore, the IRGD in non-advanced economies is likely to rise with financial integration and market development, well before their GDP per capita converges to advanced-economy levels.

Keywords: WP; real interest rate; economy; interest rate; debt; debt ratio; interest rate-growth differential; real interest rates; debt dynamics; dynamic efficiency; income catch-up; financial repression; financial integration; advanced economy; savings market; advance-economy level; growth theory; market distortion; IRGD fact; repressed economy; Financial sector development; Commercial banks; Inflation; Global (search for similar items in EconPapers)
Pages: 29
Date: 2011-11-01
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Citations: View citations in EconPapers (12)

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Journal Article: The Puzzle of Persistently Negative Interest‐Rate–Growth Differentials: Financial Repression or Income Catch‐Up? (2017)
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