r minus g negative: Can We Sleep More Soundly?

March 13, 2020

Preview Citation

Format: Chicago

Paolo Mauro, and Jing Zhou. r minus g negative: Can We Sleep More Soundly?, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Depreciation, Financial services, Fiscal policy, Fiscal stance, Inflation, National accounts, Prices, Public debt, Real interest rates

Keywords: Advanced economy, Debt ratio, Default episode, Depreciation, Depreciation adjustment, Economic growth, Emerging economies subsamples, Emerging economy, Exchange rate, Fiscal stance, Global, Government default, Inflation, Interest-growth differentials, Public debt, Real interest rates, Sovereign default, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/052
Stock No:

WPIEA2020052
ISBN:

9781513536071
ISSN:

1018-5941

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