Granger causality between public debt and inflation: evidence from panel data

Abstract

This study explores the causal links between public debt and inflation. To that end, we employ the novel homogeneous approach to test for Granger noncausality in heterogeneous panels in a sample of 121 countries from 1995 to 2022. This methodological approach is particularly appropriate for datasets characterized by highly persistent processes, a moderate temporal scope, and the presence of heterogeneous nuisance parameters. Our results suggest that, despite a unidirectional Granger causality relationship being detected from public debt to inflation in some cases, bidirectional Granger causality was identified for most countries under study when examining the pairwise relationship. However, when controlling for the explanatory variables consistently identified as conditioning the inflation–debt nexus, we found evidence of bidirectional Granger causality between public debt and inflation in all cases (with the only exception of advanced economies according to the International Monetary Fund and the group of countries with greater independence from the central bank that show a unidirectional Granger causality relationship from debt to inflation).