The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?
November 1, 2011
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Summary
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.
Subject: Commercial banks, Financial institutions, Financial markets, Financial sector development, Financial services, Inflation, Prices, Public debt, Real interest rates
Keywords: advance-economy level, advanced economy, Commercial banks, debt, debt dynamics, debt ratio, dynamic efficiency, economy, financial integration, financial repression, Financial sector development, Global, growth theory, income catch-up, Inflation, interest rate, interest rate-growth differential, IRGD fact, market distortion, real interest rate, real interest rates, repressed economy, savings market, WP
Pages:
29
Volume:
2011
DOI:
Issue:
260
Series:
Working Paper No. 2011/260
Stock No:
WPIEA2011260
ISBN:
9781463924553
ISSN:
1018-5941
