Public Debt and Economic Growth in European Economies: Evidence from Fourier Toda–Yamamoto Causality Approach

This study investigates the causal relationship between public debt and economic growth in selected European countries over the period 2000Q4-2025Q1. The analysis employs the Fourier Toda-Yamamoto causality approach, which endogenously accounts for smooth structural breaks, and compares its results with those obtained from the standard Toda–Yamamoto framework. The empirical findings indicate that public debt-to-GDP series—with the exception of France—exhibit significant structural breaks. While the standard Toda–Yamamoto test identifies limited causal relationships, the Fourier-based approach uncovers additional causal relationships that remain undetected when structural breaks are ignored. Specifically, the Fourier Toda–Yamamoto test reveals bidirectional causality in Germany, Finland, France, and Italy, suggesting a close interaction between fiscal policy and economic performance in these economies. In contrast, Austria, Greece, and Portugal exhibit unidirectional causality running from economic growth to public debt, highlighting the sensitivity of fiscal positions to changes in economic activity. No causal relationship is identified for the Netherlands and Spain. By explicitly accounting for smooth structural breaks and comparing standard and Fourier-based causality results, the study contributes to the literature by demonstrating that ignoring structural breaks may conceal important causal relationships between public debt and economic growth. These findings further support the need for more flexible and country-specific fiscal frameworks across that take into account the structural heterogeneity across the selected European countries.