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The Puzzle of Persistently Negative Interest Rate-Growth Differentials

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Author Info

  • Anna Shabunina
  • Julio Escolano
  • Jaejoon Woo

Abstract

The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita. It has been on average around 1 percentage point for large advanced economies during 1999-2008; but below -7 percentage points among non-advanced economies - exerting a powerful stabilizing influence on government debt ratios. We show that large negative IRGDs are largely due to real interest rates well below market equilibrium - possibly stemming from financial repression and captive and distorted markets, whereas the income catch-up process plays a relatively modest role. We find econometric support for this conjecture. Therefore, the IRGD in non-advanced economies is likely to rise with financial integration and market development, well before their GDP per capita converges to advanced-economy levels.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/260.

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Length: 29
Date of creation: 01 Nov 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/260

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Keywords: Real interest rates; Developed countries; Developing countries; Economic growth; Economic models; Interest rate differential; Public debt; inflation; government debt; real interest rate; private credit; debt dynamics; foreign currency; debt ratio; currency debt; foreign currency debt; domestic currency; debt crisis; sovereign debt; high inflation; currency crisis; private bank; debt ratios; sovereign bond; debt crises; central banks; debt servicing; debt outstanding; central bank; concessional debt; sovereign debt crises; sovereign debt crisis; public and publicly guaranteed; ratio of debt; capital account liberalization; domestic financial market; public finances; price level; domestic financial markets; high inflation episodes; debt burden; debt management; domestic debt; debt structure; public and publicly guaranteed debt; increase in inflation; debt stock; public finance; debt stocks; debt sustainability; stock of debt; nominal interest rates; external debt; debt defaults; global liquidity; nominal interest rate; debt service; currency crises; inflation tax;

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References

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  1. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 439-57, March.
  2. Carmen M. Reinhart & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," NBER Working Papers 16893, National Bureau of Economic Research, Inc.
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  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  8. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  9. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  10. Emanuele Baldacci & Ding Ding & David Coady & Giovanni Callegari & Pietro Tommasino & Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Expenditureson Social Programs and Household Consumption in China," IMF Working Papers 10/69, International Monetary Fund.
  11. Bartolini, Leonardo & Cottarelli, Carlo, 1994. "Government Ponzi games and the sustainability of public deficits under uncertainty," Ricerche Economiche, Elsevier, Elsevier, vol. 48(1), pages 1-22, March.
  12. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
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Cited by:
  1. Nazim Belhocine & Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 13/93, International Monetary Fund.
  2. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
  3. David Turner & Francesca Spinelli, 2013. "The Effect of Government Debt, External Debt and their Interaction on OECD Interest Rates," OECD Economics Department Working Papers 1103, OECD Publishing.

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