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

Absztrakt

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.