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Ogawa, Kazuo
Sterken, Elmer
Tokutsu, Ichiro
Year of Publication: 
Series/Report no.: 
ISER Discussion Paper 955
We investigate the causal relationship between the public debt to GDP ratio and economic growth for 31 EU and OECD countries from 1995 to 2013. A number of studies have tackled this problem, but very few make the transmission mechanism explicit in their analysis. We estimate a panel VAR model that incorporates the long-term real interest rate on government bonds as a vehicle to transmit shocks in both the public debt to GDP ratio and economic growth. We find no causal link from the public debt to GDP ratio to the GDP growth rate, irrespective of the levels of public debt. Rather, we find a causal relation from the GDP growth rate to the public debt to GDP ratio. In high-debt countries, the direct negative impact of economic growth on public debt is enhanced by a rise in the long-term real interest rate, which in turn decreases interest-sensitive demand and leads to a further increase in the public debt to GDP ratio.
Public debt
Economic growth
Interest rate
Panel VAR
Granger causality
Document Type: 
Working Paper

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