$$r-g<0$$: Can We Sleep More Soundly?

Abstract

Contrary to the traditional assumption of interest rates on government debt exceeding economic growth, negative interest-growth differentials became prevalent after the global financial crisis and before the COVID-19 pandemic. Should negative differentials be grounds for sleeping more soundly, despite high government debts? We analyze interest-growth differentials using data on average effective borrowing costs for 55 countries over up to 200 years. Negative differentials prevail for both advanced and emerging economies. Even so, several default episodes have followed periods of negative differentials, and differentials are no higher prior to defaults than in normal times. Marginal (rather than average) government borrowing costs often rise sharply, but just preceding default. Based on these results, our answer is: not really.