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.
Author/Editor:Escolano, Julio; Shabunina, Anna; Woo,Jaejoon.Authorized for Distribution: November 01, 2011
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?
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