r minus g negative: Can We Sleep More Soundly?

IMF Working Papers, March 13, 2020

Source details

Contrary to the traditional assumption that interest rates on government debt exceed economic growth, negative interest-growth differentials have become prevalent since the global financial crisis.
Research question: As interest-growth differentials are a key determinant of public debt dynamics, can we sleep more soundly despite high government debts?
Authors: Paolo Mauro, Jing Zhou
Date: March 13, 2020
Series: Working Paper No. 2020/052
Pages: 32
DOI: https://doi.org/10.5089/9781513536071.001
Issue: 052
Volume: 2020
ISBN: 9781513536071
ISSN: 1018-5941
Stock No: WPIEA2020052

Dataset: the largest historical database on average effective government borrowing costs for 55 countries over up to 200 years.
Empirical focus: interest-growth differentials (r minus g), incidence and persistence across advanced and emerging economies, behavior around sovereign default episodes.
Key subject tags from the source: Depreciation, Financial services, Fiscal policy, Fiscal stance, Inflation, National accounts, Prices, Public debt, Real interest rates.

Negative interest-growth differentials have occurred more often than not, in both advanced and emerging economies.
Negative differentials have often persisted for long historical stretches.
Differentials are no higher prior to sovereign defaults than in normal times.
Marginal (rather than average) government borrowing costs often rise abruptly and sharply, but just prior to default.
Overall conclusion drawn by the authors: based on these results, the answer to whether we can be more sanguine about high government debts is "not really."

Persistence of negative r minus g suggests that average effective borrowing costs can remain below economic growth for extended periods, reducing debt-stabilizing pressures from an r>g perspective.
The sharp and abrupt rise in marginal borrowing costs immediately prior to default highlights the importance of monitoring marginal financing conditions and tail risks, rather than relying solely on average cost measures.
Policymakers should be aware that lower average r minus g does not eliminate default risk, given the timing and size of marginal rate spikes observed historically.

advanced economy, debt ratio, default episode, Depreciation, depreciation adjustment, economic growth, emerging economies subsamples, emerging economy, exchange rate, Fiscal stance, Global, government default, Inflation, interest-growth differentials, public debt, Real interest rates, sovereign default, WP

Source: IMF Working Papers — "r minus g negative: Can We Sleep More Soundly?" by Paolo Mauro and Jing Zhou, March 13, 2020.