Long-Run Perspectives on r−g in OECD Countries: An Empirical Analysis

Abstract

The difference between the implicit nominal interest rate and the growth rate of nominal GDP is a key determinant of the dynamics and the sustainability of public debt. This paper studies the determinants of r−g in a panel of 17 OECD countries since the early 1980s. Whereas the focus of existing empirical studies is mainly on fiscal, monetary and financial factors behind the interest-growth difference, our approach and contribution are to highlight in particular the role of real long-run determinants, such as technical progress, employment growth, demographic change, and income inequality. This allows us to derive empirically based projections for r−g beyond the next five or ten years. Our baseline expectation is that r−g will stay below zero for the next two decades in most European countries that we study. An important policy implication is that the debt-carrying capacity of governments is substantially higher now than in the 1980s or 1990s.