Public Debt and Growth: New Insights

This paper approaches the causality of public debt and economic growth from three perspectives: Historical for the data, theoretical for the relations, and econometrical for the examination. We examine causality for the United States (US), United Kingdom (UK), Sweden (SE), and Japan (JP) over the period starting from 1801 up to 2011, with the nonlinearity of Fourier and Asymmetric approaches. Asymmetric causality results point out that negative shocks in growth increase debt for SE, while negative shocks in debt decrease growth for the US. Fourier causality results show that there is a unidirectional causality for US and SE from growth to debt, while for the UK there is a bi-directional causality, namely reverse causality or hysteria theory. Asymmetric causality results do not confirm that debt decreases growth in any country, while Fourier causality results show reverse causality. This result has important policy implications specifically because economic growth influences the evolution of public debt with structural breaks.