On the Causal Relationship between Public Debt and GDP Growth Rates in Panel Data Models

Josip Tica, Vladimir Arčabić, Junsoo Lee () and Robert Sonora

No 1409, EFZG Working Papers Series from Faculty of Economics and Business, University of Zagreb

Abstract: The influential and controversial paper by Reinhart and Rogoff (2010) triggered a debate on the effects of public debt on economic growth. Subsequent papers provide more convincing results. However, one of the key assumptions implied in these studies is that lower economic growth is spurred by high debt. If the reverse causality holds, the usual estimation of the model can yield biased estimators because of a feedback effect. We formally examine the causal relationship between public debt and economic growth in the panel VAR model using Granger causality test. Results show that the inter-temporal causal relationship is bi-directional. These findings provide a warning regarding the estimation results in many previous studies that might have ignored the role of the feedback effect.

Keywords: Public debt; Feedback Effect, Reverse Causality, Panel VAR models (search for similar items in EconPapers)
JEL-codes: C22 O13 (search for similar items in EconPapers)
Pages: 10
Date: 2014-12-18
New Economics Papers: this item is included in nep-fdg and nep-gro
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zag:wpaper:1409

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