Do persistently low nominal interest rates mean that governments can safely borrow more?
To addresses this question, I extend the model of Ghosh et al.  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.