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r minus g negative: Can We Sleep More Soundly?

Paolo Mauro and Jing Zhou

No 20/52, 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: Real interest rates; Interest rate parity; Interest rate differential; Financial crises; Economic integration; interest-growth differentials,public debt,WP,sovereign default,emerge economy,advanced economy,interest rate,differential (search for similar items in EconPapers)
Pages: 32
Date: 2020-03-13
New Economics Papers: this item is included in nep-rmg
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