Public Debt, Economic Growth and the Real Interest Rate: A Panel VAR Approach to EU and OECD Countries

29 Pages Posted: 2 Feb 2016

See all articles by Kazuo Ogawa

Kazuo Ogawa

Osaka University - Institute of Social and Economic Research (ISER)

Elmer Sterken

University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Ichiro Tokutsu

Konan University

Date Written: January 29, 2016

Abstract

We investigate the causal relationship between the public debt to GDP ratio and economic growth for 31 EU and OECD countries from 1995 to 2013. A number of studies have tackled this problem, but very few make the transmission mechanism explicit in their analysis. We estimate a panel VAR model that incorporates the long-term real interest rate on government bonds as a vehicle to transmit shocks in both the public debt to GDP ratio and economic growth. We find no causal link from the public debt to GDP ratio to the GDP growth rate, irrespective of the levels of public debt. Rather, we find a causal relation from the GDP growth rate to the public debt to GDP ratio. In high-debt countries, the direct negative impact of economic growth on public debt is enhanced by a rise in the long-term real interest rate, which in turn decreases interest-sensitive demand and leads to a further increase in the public debt to GDP ratio.

Keywords: Public debt, Economic growth, Interest rate, Panel VAR, Granger causality

JEL Classification: E43, H63, O47

Suggested Citation

Ogawa, Kazuo and Sterken, Elmer and Tokutsu, Ichiro, Public Debt, Economic Growth and the Real Interest Rate: A Panel VAR Approach to EU and OECD Countries (January 29, 2016). Available at SSRN: https://ssrn.com/abstract=2726367 or http://dx.doi.org/10.2139/ssrn.2726367

Kazuo Ogawa (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
+81 6 6879 8570 (Phone)

Elmer Sterken

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ichiro Tokutsu

Konan University ( email )

8-9-1 Okamoto Higashinadaku
Kobe 658-8501
Japan

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
372
Abstract Views
1,437
Rank
155,946
PlumX Metrics