Long-run perspectives on r-g in OECD countries: An empirical analysis

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. For the United States, however, our baseline projection of $r-g$ is positive.