The Causal Relationship between Debt and Growth: Evidence from OECD Countries
28 Pages Posted: 6 Apr 2014 Last revised: 15 Sep 2014
Date Written: April 4, 2014
This paper analyzes the possible causal relationship between debt and growth in 16 OECD countries from 1980 to 2009. This is done considering not only government debt but also non- financial corporate and household debt. The panel bootstrap Granger causality test applied allows us to control for both the presence of cross-country heterogeneity and cross-sectional dependence. Our results barely provide evidence against the null hypothesis according to which government debt does not cause real GDP per capita growth. More interestingly, we find evidence against the absence of causality from non- financial private debt - especially that of households - to growth. Finally, government debt is found to be negatively influenced by growth.
Keywords: Debt, Growth, Granger causality, SUR estimation, Bootstrap
JEL Classification: C32, H30, H63, O40, O57
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