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

30 Pages Posted: 19 Nov 2011

See all articles by Jaejoon Woo

Jaejoon Woo

International Monetary Fund (IMF) - Fiscal Affairs Department

Anna Shabunina

International Monetary Fund (IMF)

Julio Escolano

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: November 2011

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

Woo, Jaejoon and Shabunina, Anna and Escolano, Julio, The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up? (November 2011). Available at SSRN: https://ssrn.com/abstract=1961907 or http://dx.doi.org/10.2139/ssrn.1961907

Jaejoon Woo (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Anna Shabunina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Julio Escolano

International Monetary Fund (IMF) - Fiscal Affairs Department

700 19th Street, NW
Washington, DC 20431
United States

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