On the Bi-Directional Causal Relationship between Public Debt and Economic Growth in EMU Countries
32 Pages Posted: 11 May 2015
Date Written: May 11, 2015
New evidence is presented on the possible existence of bi-directional causal relationships between public debt and economic growth in both central and peripheral countries of the European Economic and Monetary Union. We test for heterogeneity in the bi-directional Granger-causality across both time and space during the period between 1980 and 2013. The results suggest evidence of a “diabolic loop” between low economic growth and high public debt levels in Spain after 2009. For Belgium, Greece, Italy and the Netherlands debt has a negative effect over growth from an endogenously determined breakpoint and above a debt threshold ranging from 56% to 103% depending on the country.
Keywords: Public debt, economic growth, Granger-causality, euro area, peripheral EMU countries, central EMU countries.
JEL Classification: C22, F33, H63, O40, O52
Suggested Citation: Suggested Citation