The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?

Anna Shabunina, Julio Escolano, Jaejoon Woo
2011 IMF Working Papers  
The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita. It has been on average around one 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
more » ... nd 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. JEL Classification Numbers: E31, E4, E6, G1, H6, O47
doi:10.5089/9781463924553.001 fatcat:7omq6liunndalbcw7jd34gchom