The Relationship Between Increased Debt Ratio and Economic Growth in the European Union: The Granger Causality Approach

Abstract

Increased government debt rates in recent years can be easily financed in the current global economic environment characterised by liquidity abundance. Nevertheless, the debt ratios represent a potential threat under the surface, which could lead to significant macroeconomic problems in the future. The purpose of the paper is to contribute to the debate in the empirical studies between public debt and economic growth, as well as external debt and economic growth. During the analyses, the relationship between variables was examined using the panel Granger causality test with the Dumitrescu–Hurlin test in the Member States of the European Union. The main findings of the study are that there is a unidirectional causal effect between public debt and economic growth, that is, only debt impacts on the economic growth. In case of external debt and economic growth there is also a unidirectional effect, but it is in the reverse direction. In addition, the pre-crisis and post-crisis period was also examined, on the basis of which it can be concluded that before the crisis, the nature of the relationship was bidirectional between public debt and economic growth, whereas after the crisis the debt had an impact on the economy growth, and the reverse effect does not exist.