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Explaining the Interest-Rate-Growth Differential Underlying Government Debt Dynamics

  • David Turner
  • Francesca Spinelli
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    The differential between the interest rate paid to service government debt and the growth rate of the economy is a key concept in assessing fiscal sustainability. Among OECD economies, this differential was unusually low for much of the last decade compared with the 1980s and the first half of the 1990s. This paper investigates the reasons behind this profile using panel estimation on 23 OECD economies. The results suggest that the fall is partly explained by lower inflation volatility associated with the adoption of monetary policy regimes which credibly target low inflation, which might be expected to continue. However, the low differential is also partly explained by factors which are likely to be reversed in the future, including very low policy rates, the “global savings glut” and the effect which the European Monetary Union had in reducing long-term interest differentials in the pre-crisis period. The differential is also likely to rise in the future because the number of countries which have debt-to-GDP ratios above a threshold at which there appears to be an effect on sovereign risk premia has risen sharply. Moreover, debt is projected to increasingly rise above this threshold in most of these countries. Expliquer le différentiel entre taux d'intérêt et croissance qui sous-tend la dynamique de la dette publique Le différentiel entre le taux d’intérêt payé sur la dette publique et le taux de croissance de l’économie est un concept clé pour évaluer la viabilité budgétaire. Parmi les économies de l’OCDE, ce différentiel a été exceptionnellement bas pendant une grande partie de la décennie passée en comparaison des années 80 et de la première moitié des années 90. Le présent document cherche à expliquer ce profil à l’aide d’une estimation en panel réalisée sur 23 pays de l’OCDE. Les résultats semblent indiquer que la diminution de l’écart s’explique en partie par une plus faible volatilité de l’inflation associée à l’adoption de régimes de politique monétaire visant de façon crédible un taux d’inflation peu élevé, un facteur qui paraît devoir persister. Cependant, cet écart peu marqué est aussi imputable, pour partie, à des facteurs qui vont sans doute s’inverser dans l’avenir, notamment des taux directeurs très bas, l’ « excédent mondial d’épargne » et l’impact de la réduction des différentiels de taux d’intérêt à long terme opérée au sein de l’Union monétaire européenne au cours de la période qui a précédé la crise. L’écart pourrait aussi se creuser dans l’avenir du fait de la forte augmentation du nombre de pays dont le ratio dette-PIB dépasse un seuil qui, apparemment, déclenche un effet sur la prime de risque souverain. De plus, la dette va sans doute dépasser de plus en plus largement ce seuil dans la plupart de ces pays.

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    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 919.

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    Date of creation: 19 Dec 2011
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    Handle: RePEc:oec:ecoaaa:919-en
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