Debt and Economic Growth: Is There Any Causal Effect? An Empirical Analysis with Structural Breaks and Granger Causality for Greece

Abstract

Abstract. During the last decade Greece has faced many economic problems. The economy is teetering on the brink of bankruptcy and the debt deepens. In this paper we will examine whether the debt is promoting economic growth in Greece. We use time series data from 1980 to 2010. The data is fitted into the regression equation using econometric techniques such as Phillips – Perron, Augment Dickey – Fuller and KPSS. We are testing the variables with techniques such as Zivot Andrew’s, Perron’s and Bai Perron’s tests to find any structural breaks. Then we are testing to see if there is any causal effect in our model with Granger causality test. The results reveal that there are structural breaks in the economy of Greece but no causality between the variables.

Keywords: Economic growth, public debt, structural breaks, Bai Perron test, Granger causality

JEL Classification: A10, C32, N15