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We analyse the direction of causality between public debt and real economic growth in a sample of 20 OECD countries for a period of 40 years starting in 1970. Given the persistence of real growth rates, we estimate canonical cointegrating regressions to allow for the possibility of stochastic cointegrating vectors. We then make inferences about the direction of causality by means of both Granger tests and VAR-based tests that do not depend on whether the series are integrated or cointegrated. We found that while modern welfare states tend to face low real growth following increases in public debt, more traditional welfare states and those with larger governments typically exhibit either causality from low growth to debt accumulation or bidirectional causality. However, the heterogeneity of the results suggests caution when making general statements about the relationship between these variables. In particular, the causal link is intrinsic to each country and it cannot be inferred that higher debt always leads to lower economic growth.

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This paper examines the causality between financial development and economic growth for over 80 countries around the world with different levels of per capita income during 1970-2014. I employed the vector autoregression (VAR) approach to conduct Granger causality tests to determine the direction of causality relationship between financial development and economic growth. The results provide evidence of two of the three main views on the link between financial development and economic growth: the supply leading theory (financial development causes economic growth or positive causality); and the demand following response (economic growth causes financial development or reverse causality). The results of this study suggest that: 1) there is a strong evidence that causality exists between the financial development and economic growth, 2) direction of causality is bidirectional in countries with higher GDP per capita; 3) an evidence of positive causality running from finance to real sector growth for middle-and low-income countries. The findings are consistent with earlier literature in that the direction of causality may be country specific. However, it does not fully support King and Levine conclusion that finance is a leading sector to long run economic growth. The findings of this research give some further guidance as to whether a well-developed financial sector is a necessary condition for a higher growth rates for developing countries and provide an important policy implication both for OECD countries as well as for countries that have financial sectors that are comparatively underdeveloped.