Are high real interest rates bad for world economic growth?

Abstract

There is a conventional perception that high real interest rates are bad for economic growth. However, the authors show that close examination of the experience over the last 40 years undermines the existence of such a relationship. For much of the 1950-79 period, expost real interest rates were less than the growth rate of income in the major economies, whereas the 1980s were a period of rapid growth in the world economy that coincided withunprecedentedly high real interest rates. The authors stress that the critical question is whether real interest rates have had an adverse effect on economic growth, not why they have been high in the recent past. To test this, the literature on cointegration is used to explore whether world interest rates and growth rates equilibrate in the long run. The econometric evidence disputes the view that high interest rates are associated with low economic growth in industrial countries. What does this analysis imply for the consequences of high real interest rates in the future? One implication is that high real interest rates may not matter for growth performance if more productive investment results. If there is a negative impact of higher interest rates on growth, it will probably affect developing countries more. Further research might consider the role of human capital and institutional constraints in determining the ambiguous relationship between world interest rates and growth in developing countries.Insurance&Risk Mitigation,Environmental Economics&Policies,Macroeconomic Management,Economic Stabilization,Economic Theory&Research