r minus g negative: Can We Sleep More Soundly?

Paolo Mauro and Jing Zhou

No 2020/052, IMF Working Papers from International Monetary Fund

Abstract: Contrary to the traditional assumption of interest rates on government debt exceeding economic growth, negative interest-growth differentials have become prevalent since the global financial crisis. As these differentials are a key determinant of public debt dynamics, can we sleep more soundly, despite high government debts? Our paper undertakes an empirical analysis of interestgrowth differentials, using the largest historical database on average effective government borrowing costs for 55 countries over up to 200 years. We document that negative differentials have occurred more often than not, in both advanced and emerging economies, and have often persisted for long historical stretches. Moreover, differentials are no higher prior to sovereign defaults than in normal times. Marginal (rather than average) government borrowing costs often rise abruptly and sharply, but just prior to default. Based on these results, our answer is: not really.

Keywords: WP; emerging economy; debt ratio; emerging economies subsamples; interest-growth differentials; public debt; exchange rate; advanced economy; sovereign default; economic growth; Fiscal stance; Inflation; Real interest rates; Depreciation; Global; default episode; depreciation adjustment; government default (search for similar items in EconPapers)
Pages: 32
Date: 2020-03-13
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Citations: View citations in EconPapers (11)

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