R Minus G Negative: Can We Sleep More Soundly?

Contrary to the traditional assumption of interest rates on government debt exceeding economicgrowth, negative interest-growth differentials have become prevalent since the global financialcrisis. As these differentials are a key determinant of public debt dynamics, can we sleep moresoundly, despite high government debts? Our paper undertakes an empirical analysis of interestgrowthdifferentials, using the largest historical database on average effective governmentborrowing costs for 55 countries over up to 200 years. We document that negative differentialshave occurred more often than not, in both advanced and emerging economies, and have oftenpersisted for long historical stretches. Moreover, differentials are no higher prior to sovereigndefaults than in normal times. Marginal (rather than average) government borrowing costs oftenrise abruptly and sharply, but just prior to default. Based on these results, our answer is: notreally.