R Minus G Negative: Can We Sleep More Soundly?

33 Pages Posted: 20 Apr 2020

See all articles by Paolo Mauro

Paolo Mauro

International Monetary Fund (IMF)

Jing Zhou

International Monetary Fund (IMF)

Date Written: March 2020


Contrary to the traditional assumption of interest rates on government debt exceeding economicgrowth, negative interest-growth differentials have become prevalent since the global financialcrisis. As these differentials are a key determinant of public debt dynamics, can we sleep moresoundly, despite high government debts? Our paper undertakes an empirical analysis of interestgrowthdifferentials, using the largest historical database on average effective governmentborrowing costs for 55 countries over up to 200 years. We document that negative differentialshave occurred more often than not, in both advanced and emerging economies, and have oftenpersisted for long historical stretches. Moreover, differentials are no higher prior to sovereigndefaults than in normal times. Marginal (rather than average) government borrowing costs oftenrise abruptly and sharply, but just prior to default. Based on these results, our answer is: notreally.

Keywords: Real interest rates, Interest rate parity, Interest rate differential, Financial crises, Economic integration, interest-growth differentials, public debt, WP, sovereign default, emerge economy, advanced economy, interest rate, differential

JEL Classification: E43, E62, H63, E01, G21, F16

Suggested Citation

Mauro, Paolo and Zhou, Jing, R Minus G Negative: Can We Sleep More Soundly? (March 2020). IMF Working Paper No. 20/52, Available at SSRN: https://ssrn.com/abstract=3579672

Paolo Mauro (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Jing Zhou

International Monetary Fund (IMF) ( email )

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

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