The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?
IMF Working Papers, November 1, 2011
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Bibliographic details
- Authors: Anna Shabunina, Julio Escolano, Jaejoon Woo
- Published: November 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463924553.001
Overview
- The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita.
- Average IRGD: around 1 percentage point for large advanced economies during 1999-2008.
- Average IRGD: below -7 percentage points among non-advanced economies over the same period.
- Large negative IRGDs exert a powerful stabilizing influence on government debt ratios.
Key findings
- Large negative IRGDs are largely due to real interest rates well below market equilibrium.
- Possible causes identified: financial repression and captive and distorted markets.
- The income catch-up process plays a relatively modest role in explaining negative IRGDs.
- Econometric analysis supports the conjecture that market distortions, rather than income catch-up, are the primary drivers of large negative IRGDs.
Econometric evidence (summary)
- Empirical results provide support for the view that real interest rates in non-advanced economies are depressed relative to market equilibrium.
- The pattern of IRGDs correlates strongly with measures of financial development and market integration (as summarized in the authors' analysis).
Implications and projections
- The IRGD in non-advanced economies is likely to rise with financial integration and market development.
- This rise in IRGD is expected to occur well before GDP per capita converges to advanced-economy levels.
- Rising IRGD implies a reduction in the powerful stabilizing influence negative differentials have had on government debt ratios in non-advanced economies.
Key statistics
- "around 1 percentage point" — IRGD for large advanced economies during 1999-2008.
- "below -7 percentage points" — IRGD among non-advanced economies during 1999-2008.
- "1999-2008" — period referenced for comparative IRGD averages.
Source: IMF Working Paper "The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?" by Anna Shabunina, Julio Escolano, and Jaejoon Woo (November 1, 2011).