EFZG working paper series, No. 09, 2014.
Other
On the Causal Relationship between Public Debt and GDP Growth Rates in Panel Data Models
Josip Tica
; Faculty of Economics and Business, University of Zagreb
Vladimir Arčabić
; Faculty of Economics and Business, University of Zagreb
Junsoo Lee
; Department of Economics, Finance & Legal Studies, University of Alabama
Robert J. Sonora
; Department of Economics, Fort Lewis College
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
Hrčak ID:
136526
URI
Publication date:
18.12.2014.
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