02050cas a2200241 a 4500 AALejournalIMF018406 230101c9999 xx r poo 0 0eng d 5.00 USD 9781484350980 1018-5941 BD-DhAAL BD-DhAAL Barrett, Philip. Interest-Growth Differentials and Debt Limits in Advanced Economies / Philip Barrett. Washington, D.C. : International Monetary Fund, 2018. 1 online resource (55 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Do persistently low nominal interest rates mean that governments can safely borrow more? To addresses this question, I extend the model of Ghosh and others [2013] to allow for persistent stochastic changes in nominal interest and growth rates. The key model parameter is the long-run difference between nominal interest and growth rates; if negative, maximum sustainable debts (debt limits) are unbounded. I show how both VAR- and spectral-based methods produce negative point estimates of this long-run differential, but cannot reject positive values at standard significance levels. I calibrate the model to the UK using positive but statistically plausible average interest-growth differentials. This produces debt limits which increase by only around 5% GDP as interest rates fall after 2008. In contrast, only a tiny change in the long-run average interest-growth differential - from the 95th to the 97.5th percentile of the distribution - is required to move average debt limits by the same amount. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2018/082 Full text available on IMF http://elibrary.imf.org/view/journals/001/2018/082/001.2018.issue-082-en.xml IMF e-Library