{
  "title": "Interest-Growth Differentials and Debt Limits in Advanced Economies",
  "publication": "IMF Working Papers, April 6, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/04/11/interest-growth-differentials-and-debt-limits-in-advanced-economies-45794",
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  "summary": "Do persistently low nominal interest rates mean that governments can safely borrow more? To addresses this question, I extend the model of Ghosh et al. [2013] to allow for persistent stochastic changes in nominal interest and growth rates.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Research question: Do persistently low nominal interest rates mean that governments can safely borrow more?\n- Approach: Extension of the model of Ghosh et al. [2013] to allow for persistent stochastic changes in nominal interest and growth rates.\n- Key model parameter: the long-run difference between nominal interest and growth rates; if negative, maximum sustainable debts (debt limits) are unbounded."
    },
    {
      "heading": "Methodology",
      "content": "- Empirical methods used:\n  - VAR-based methods\n  - Spectral-based methods\n- Outcome of estimation methods:\n  - Both VAR- and spectral-based methods produce negative point estimates of the long-run interest-growth differential, but cannot reject positive values at standard significance levels."
    },
    {
      "heading": "Key Findings",
      "content": "- The long-run difference between nominal interest and growth rates is the critical determinant of whether debt limits are bounded or unbounded.\n- Empirical estimates:\n  - Negative point estimates for the long-run differential from both VAR- and spectral-based methods.\n  - Statistical uncertainty remains: positive values cannot be rejected at standard significance levels.\n- Calibration to the UK:\n  - Using positive but statistically plausible average interest-growth differentials produces debt limits which increase by only around 5% GDP as interest rates fall after 2008.\n  - A tiny change in the long-run average interest-growth differential — from the 95th to the 97.5th percentile of the distribution — is sufficient to move average debt limits by the same amount."
    },
    {
      "heading": "Calibration and Quantitative Results",
      "content": "- Country calibrated: United Kingdom (UK)\n- Quantitative illustrations:\n  - Debt limits increase by only around 5% GDP as interest rates fall after 2008 under the chosen calibration.\n  - Sensitivity: movement from the 95th to the 97.5th percentile of the long-run differential distribution produces an equivalent change in average debt limits."
    },
    {
      "heading": "Policy-Relevant Implications",
      "content": "- Persistence and uncertainty in nominal interest and growth rates matter critically for sustainable public debt assessments.\n- Point estimates suggesting negative long-run interest-growth differentials do not, by themselves, imply that higher borrowing is safe because positive values remain statistically plausible.\n- Small changes in the assumed long-run average interest-growth differential can imply large changes in estimated debt limits, highlighting high sensitivity and model uncertainty for fiscal space assessments.\n\n---\n\n Content in this bundle\n\n- Interest-Growth Differentials and Debt Limits in Advanced Economies, WP/18/82, April 2018\n  - Interest-Growth Differentials and Debt Limits in Advanced Economies, WP/18/82, April 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Interest-Growth Differentials and Debt Limits in Advanced Economies, WP/18/82, April 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/04/11/interest-growth-differentials-and-debt-limits-in-advanced-economies-45794"
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    "Authors: Philip Barrett",
    "Published: April 6, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484350980.001",
    "Research question: Do persistently low nominal interest rates mean that governments can safely borrow more?",
    "Approach: Extension of the model of Ghosh et al. [2013] to allow for persistent stochastic changes in nominal interest and growth rates.",
    "Key model parameter: the long-run difference between nominal interest and growth rates; if negative, maximum sustainable debts (debt limits) are unbounded.",
    "Empirical methods used:",
    "Outcome of estimation methods:",
    "The long-run difference between nominal interest and growth rates is the critical determinant of whether debt limits are bounded or unbounded.",
    "Empirical estimates:",
    "Calibration to the UK:",
    "Country calibrated: United Kingdom (UK)",
    "Quantitative illustrations:",
    "Persistence and uncertainty in nominal interest and growth rates matter critically for sustainable public debt assessments.",
    "Point estimates suggesting negative long-run interest-growth differentials do not, by themselves, imply that higher borrowing is safe because positive values remain statistically plausible.",
    "Small changes in the assumed long-run average interest-growth differential can imply large changes in estimated debt limits, highlighting high sensitivity and model uncertainty for fiscal space assessments.",
    "**Interest-Growth Differentials and Debt Limits in Advanced Economies, WP/18/82, April 2018**"
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