Changes in nominal interest rates have a larger impact on the distribution of income in non-financial business than changes in wages. If the rate of interest rises from, say, 5 percent to 8 percent, then interest payments on bank loans (taken up at variable interest rates) will go up by 60 percent, thereby weakening the corporate revenue position. Consequently the debt revenue ratio will rise and force enterprises to consolidate their financial position: by sharply cutting investment and borrowing they will then exacerbate the cyclical downturn caused inter alia by the rise in interest rates. This effect will be the more pronounced, the longer interest rate hike lasts (usually two or even three years in industrialized countries). In a recession, rising public transfers and shrinking tax revenues blow up the deficit: the cut in the corporate debt burden entails a rise in government debt. Hence, on empirical grounds, persistent rises in the rate of interest, mainly due to the policy of the central bank, are rather causes for a cyclical widening of the budget deficit than vice versa. With regard to the medium run, the main results of the study are as follows: since the late 1970s, the rate of interest has come to lie permanently above the rate of growth (this fundamental change in financial conditions was mainly caused by the shift towards a monetarist policy regime on behalf of the most important central banks). Under such conditions, net debtors like the corporate or the public sector may stabilize their debt-to-GDP ratio only if they achieve a surplus in their primary balances, i.e., if they borrow less than they pay in interest on their old debts. Since the late 1970s, enterprises have indeed turned their aggregate primary deficit to a permanent surplus, by shifting investment from real towards financial assets. Thus, physical capital and corporate debt have both expanded less than GDP, leading also to a slower rise in employment. At the same time, private households continued to hold primary surpluses (their aggregate saving exceeded net interest receipts), so that it become hardly impossible for the government sector to accumulate primary surpluses; as a result, its debt rose relative to GDP in almost all industrialized countries since the early 1980s. The "switch" from a negative to a positive interest rate/growth differential therefore caused private savings to be channeled less into productive capacity (and employment) and more into government bonds.
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