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The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?

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  • Jaejoon Woo
  • Ms. Anna Shabunina
  • Mr. Julio Escolano

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.

Suggested Citation

  • Jaejoon Woo & Ms. Anna Shabunina & Mr. Julio Escolano, 2011. "The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?," IMF Working Papers 2011/260, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2011/260
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    Cited by:

    1. van Riet, Ad, 2018. "Financial repression and high public debt in Europe," Other publications TiSEM 3391dd73-357a-4071-825c-7, Tilburg University, School of Economics and Management.
    2. Mr. Geremia Palomba & Mariusz Jarmuzek & Mr. David Amaglobeli & Mr. Nicolas End, 2015. "From Systemic Banking Crises to Fiscal Costs: Risk Factors," IMF Working Papers 2015/166, International Monetary Fund.
    3. Mr. Philip Barrett, 2018. "Interest-Growth Differentials and Debt Limits in Advanced Economies," IMF Working Papers 2018/082, International Monetary Fund.
    4. Miss Anke Weber & Mr. Tidiane Kinda & Ms. Priscilla S Muthoora & Till Cordes, 2015. "Expenditure Rules: Effective Tools for Sound Fiscal Policy?," IMF Working Papers 2015/029, International Monetary Fund.
    5. David Turner & Francesca Spinelli, 2011. "Explaining the Interest-Rate-Growth Differential Underlying Government Debt Dynamics," OECD Economics Department Working Papers 919, OECD Publishing.
    6. Paolo Mauro & Jing Zhou, 2021. "$$r-g," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 197-229, March.
    7. Mr. Paolo Mauro & Jing Zhou, 2020. "r minus g negative: Can We Sleep More Soundly?," IMF Working Papers 2020/052, International Monetary Fund.
    8. Nazim Belhocine & Mr. Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 2013/093, International Monetary Fund.
    9. 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.
    10. Wenzlaff, Ferdinand & Kimmich, Christian & Richters, Oliver, 2014. "Theoretische Zugänge eines Wachstumszwangs in der Geldwirtschaft," Discussion Papers 45, University of Hamburg, Centre for Economic and Sociological Studies (CESS/ZÖSS).

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