Leonardo Badea (National Bank of Romania): Why the Interest–Growth Differential Should Concern Governments

The differential between the cost of debt (r) and the economic growth rate (g), known as “r–g,” represents a fundamental element in analyzing public debt sustainability. If r is lower than g, the economy as a whole expands faster than the cost of financing public debt, allowing the state to maintain or reduce the debt-to-GDP ratio without the need for significant fiscal adjustments. Conversely, when r exceeds g, public debt tends to grow faster than GDP, requiring fiscal consolidation measures to prevent a substantial increase in the debt burden.

This topic has drawn the attention of many leading economists. A notable contribution in this regard belongs to Thomas Piketty, who, in his 2014 book, highligh...