Have inflation and monetary tightening changed the game? Long-run perspectives on the interest – growth difference on public debt

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 empirical studies is mainly on fiscal, monetary and financial drivers of the interest–growth difference, our approach and contribution are to highlight in particular the impact of real long-run drivers, such as technical progress, employment growth, 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 the major shocks that hit many economies in 2022-2023 have not fundamentally changed the game. Our baseline expectation is that the structural drivers of the interest rate and growth will keep r - g below zero for the next two decades in most European countries that we study. For the US, however, our baseline projection of r - g is positive.

Keywords: public debt; r - g; fiscal sustainability; demographic change; inequality (search for similar items in EconPapers)
JEL-codes: E43 E62 H63 H68 J11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-02
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:23/1065

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