The relationship and causality between public debt and economic growth

Abstract

This thesis takes a look at the relationship between public debt and economic growth and analysis the direction of causality between these two variables. In this dissertation, the author performs a granger-causality test in order to analyse the relationship between public debt and economic growth. Additional variables are included in the regression in order to examine how through debt, these variables may have an impact on economic growth. The main hypothesis addressed in this dissertation is the direction of causality between public debt and economic growth and also to assess the full extent of the affect that public debt and other mechanisms have on economic growth. A brief description on the debt accumulation and economic growth has also been presented for a selection of EU. The results presented in this dissertation indicate that for a country with a low debt to GDP ratio the relationship between debt and economic growth is positive. On the other hand, for countries with high debt to GP ratios this relationship is clearly negative. The only exception to these results is Denmark which despite the low debt to GDP ratio registers negative relationship between the variables.