Public Debt and Economic Growth nexus: A Dynamic Panel ARDL approach

The impact of public debt on economic growth has been a pertinent topic over the last decade following the financial and global economic crisis. This empirical study examines the debt and growth nexus for a panel of 25 European Union member states over the 1996-2017 period. A panel autoregressive distributed lag model (ARDL) is used to analyse the impact of debt on growth. This framework helps in determining both the long and short-run impact of debt on growth. This mitigates some limitations of previous empirical literature that explains either the short- or long-run effect. The full panel ARDL estimation illustrates a negative relationship between debt and growth both over the long and short-term. The debt and growth nexus, although of different magnitudes, is also negative across high and low levels of debt and across different time periods. Finally, a Dumitrescu Hurlin panel causality test is carried out to establish the causal direction between debt and growth. Evidence of bidirectional causality is detected for the full panel of countries. However, the direction of causality varies between countries with high and low average debt-to-GDP ratio.