The causal relationship between public debt and economic growth in G7 countries: new evidence from time and frequency domain approaches

Oguzhan Bozatli (), Seref Can Serin () and Murat Demir ()
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Oguzhan Bozatli: Osmaniye Korkut Ata University
Seref Can Serin: Harran University
Murat Demir: Harran University

Economic Change and Restructuring, 2024, vol. 57, issue 3, No 44, 27 pages

Abstract: Abstract Investigators of the public debt-economic growth nexus have yet to fully address the crucial issue of determining the direction of causality. There is an implicit assumption—or perception—that the causal relationship is mostly from public debt to economic growth. Beyond this, causal relationships may vary according to the presence of structural breaks as well as different frequency characteristics. The focus of this study is to address these issues. In this context, we comparatively investigate how structural changes and frequency characteristics affect the public debt-economic growth nexus using historical data covering the period 1870–2020 for G7 countries. Methodologically, we use Fourier Toda-Yamamoto and frequency-domain causality techniques from time and frequency-based approaches, respectively. Consistent with our expectations, we show that in the link between public debt and economic growth, they differ from or in some cases confirm each other based on the time and frequency-domain approaches. According to both approaches, in Italy and Japan, the feedback effect is valid, implying a mutual interaction between public debt and economic growth. Also, we find that this relationship is permanent. Similarly, we conclude that there is no causal relationship for France according to both approaches. For the remaining countries, however, we provide diverse evidence on both the direction of causality and the temporary/permanent nature of the causal relationship. The results on temporary or permanent causality at different frequencies offer policymakers and researchers detailed insights into an obscure aspect of the existing literature.

Keywords: Public debt; Economic growth; G7; Frequency domain causality; Time domain causality (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10644-024-09716-8

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