Should we worry about public debt? An empirical analysis of r – g in OECD countries

Freddy Heylen, Marthe Mareels and Christophe Van Langenhove

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: The difference between the implicit nominal interest rate and the growth rate of nominal GDP is a key determinant of the dynamics and the sustainability of public debt. This paper studies the determinants of r - g in a panel of 17 OECD countries since the early 1980s. Whereas the focus of existing studies is mainly on fiscal, monetary and financial drivers of the interest–growth difference, our approach and contribution are to include and highlight in particular the impact of real long-run drivers, such as technical progress, employment growth, components of demographic change, and income inequality. This allows us to derive empirically based projections for r - g beyond the next five or ten years. Our projections suggest that r - g remains negative for the next two decades in most European countries that we study, but not in the United States. The debt-carrying capacity of governments in Europe is structurally higher now than in recent decades. This allows to worry less about public debt, but does not exempt policy makers from the task to strongly monitor their expenditures and balances, given major challenges ahead.

Keywords: public debt; r - g; fiscal sustainability; fiscal rules; demographic change; inequality (search for similar items in EconPapers)
JEL-codes: E43 E62 H63 H68 J11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2022-02
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:22/1040

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