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Public Debt and Economic Growth: a Granger Causality Panel Data Approach

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Listed:
  • António Afonso
  • Sebastian Hauptmeier

Abstract

This paper analyses the Granger-causality relationship between the growth of the real GDP per capita and the public debt, here represented by the ratio of the current primary surplus/GDP and the ratio of the gross Government debt/GDP. Using OECD annual data for 20 countries between 1988 and 2001, we adapt the methodology recently applied by Erdil and Yetkiner (2008) and we conclude that there is clear Granger causality and that it is always bi-directional. In addition, our findings point to a heterogeneous behaviour across the different countries. These results have important policy implications since not only does public debt restrain economic growth, but also real GDP per capita growth influences the evolution of public debt. Key words: panel data; public debt and economic growth

Suggested Citation

  • António Afonso & Sebastian Hauptmeier, 2009. "Public Debt and Economic Growth: a Granger Causality Panel Data Approach," Working Papers Department of Economics 2009/24, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    • Handle: RePEc:ise:isegwp:wp242009
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    References listed on IDEAS

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    1. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1243-1259.
    2. Konya, Laszlo, 2004. "Unit-Root, Cointegration and Granger Causality Test Results for Export and Growth in OECD Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(2), pages 67-94.
    3. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 168, European Central Bank.
    4. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    5. Nair-Reichert, Usha & Weinhold, Diana, 2001. "Causality Tests for Cross-Country Panels: A New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    6. Mehrotra, Aaron N. & Peltonen, Tuomas A., 2005. "Socio-economic development and fiscal policy: lessons from the cohesion countries for the new member states," Working Paper Series 467, European Central Bank.
    7. Christophe Hurlin, 2004. "Testing Granger causality in Heterogeneous panel data models with fixed coefficients," Post-Print halshs-00257395, HAL.
    8. Andrea F. Presbitero, 2006. "The Debt-Growth Nexus: a Dynamic Panel Data Estimation," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 417-462.
    9. Ms. Hélène Poirson & Mr. Luca A Ricci & Ms. Catherine A Pattillo, 2004. "What Are the Channels Through Which External Debt Affects Growth?," IMF Working Papers 2004/015, International Monetary Fund.
    10. Erkan Erdil & I. Hakan Yetkiner, 2009. "The Granger-causality between health care expenditure and output: a panel data approach," Applied Economics, Taylor & Francis Journals, vol. 41(4), pages 511-518.
    11. repec:dau:papers:123456789/6159 is not listed on IDEAS
    12. Schclarek, Alfredo, 2004. "Debt and Economic Growth in Developing and Industrial Countries," Working Papers 2005:34, Lund University, Department of Economics.
    13. Usha Nair‐Reichert & Diana Weinhold, 2001. "Causality Tests for Cross‐Country Panels: a New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    14. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    Cited by:

    1. Yanrui Wu, 2020. "Local Government Debt And Economic Growth In China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 18(3), pages 229-242, July.
    2. Wu, Yanrui, 2014. "Local government debt and economic growth in China," BOFIT Discussion Papers 20/2014, Bank of Finland Institute for Emerging Economies (BOFIT).
    3. repec:zbw:bofitp:2014_020 is not listed on IDEAS

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    More about this item

    Keywords

    panel data; public debt and economic growth;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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