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

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.
Publication date: November 2011
ISBN: 9781463924553
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Economics- Macroeconomics , Economics / General , International - Economics , 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 , d

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