GOVERNMENT DEBT AND ECONOMIC GROWTH: A GRANGER CAUSALITY ANALYSIS OF PANEL DATA EVIDENCE

This study examines the causal relationship between Economic Growth and Government Debt using a panel Granger causality test. The empirical results based on 159 countries show that the relationship between these two variables differs depending on the income cohort to which a country belongs. The findings also suggest that differences exist in the long run and short run causality patterns between growth and debt. In short term, the results reveal that there is unidirectional causality running from economic growth to public debt at all income levels. However, when we test the long run equilibrium relationship by VEC model, there are three distinct outcomes for each different income group. First, the model shows that an increase in government debt will lead to an acceleration in economic growth for low income countries. Moreover, Granger causality analysis for the middle income level investigates the long-run co-movements and interaction between growth and debt. While it explores the unpotential contribution growth-debt and vice versa in high income countries.