| Summary: | In the aftermath of the global financial crisis, and the subsequent sovereign debt crisis, the relationship between public debt and economic growth was put at the centre of economic policy discussions, specifically regarding the possible existence of a maximum public debt threshold after which economic growth would be severely impaired. By analysing the short-run relationship between public debt and economic growth for a panel of 10 European Monetary Union (EMU) countries over a period of 22 years, from 1995 to 2016, our results suggest that, by following Reinhart and Rogoff (2010) rationale, the debt-to-GDP ratio threshold would be at 120%. Regarding the direction of causality, our results suggest that public debt causes economic growth in most of the countries analysed. However, by splitting the analysis between the pre-crisis and post-crisis periods, we found evidence that the global financial crisis had an effect in changing the causality in the debtgrowth relationship. This analysis also showed that the causal relationship varies across countries. Finally, our threshold analysis provided evidence of a Laffer-curve (inverted Ushape curve) relationship between public debt and economic growth, for which we estimated a maximum public debt threshold around 86% debt-to-GDP ratio. Considering our results and the current public debt levels, governments should pursue policies that allow the decrease of their level of indebtedness to improve economic performance.
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