Debt and economic growth in the European Union: what causes what?

Candida Ferreira

No 2014/08, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: This paper contributes to the empirical investigation of the causality relations between real GDP growth and the growth of three debt categories, namely public, foreign and private debt, in the universe of the 28 European Union countries during the past decade. By using panel Granger causality estimations, we find nonstatistically significant causality between foreign debt and economic growth and the limited importance of the causality between private debt and real GDP growth. On the contrary, the results obtained show statistically relevant bidirectional causality relations between public debt and economic growth, and this is true before and after the outbreak of the recent financial crisis. Moreover, there is clear evidence of economic growth’s contribution to the decrease in public debt.

Date: 2014-05
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-gro
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More papers in Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL.
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