This paper investigates the relationship between government debt with public and
private capital. First, a theoretical approach is applied with the assumption that
the government employs a fully funded social system using Overlapping Generations Model to examine the impact of debt on the capitals. Using annual data from
1980-2020 for 10 OECD countries a granger causality test-Dumistreu and Hurlin
is applied to check the validity of the theory. We find that, there is a negative
relationship for both private and public capital in theory, this indicating that there
is crowding out of both private and public investment as long as government debt
continues to rise. The empirical results other hand show that public capital does
not granger cause government debt, with an example of contributions from the
young for investment this result can be backed with evidence. We later conclude a
one directional causality, the same applying with private capital

Contents
1 Introduction 1
2 Theoretical Model 7
2.1 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 The Comparative Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3 Data and Empirical Methods 13
3.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Unit Root Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.3 Granger Causality Test - Dumitrescu Hurlin Causality Test . . . . . . . . 14
3.4 Bootstrapping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.5 Fixed and Random Effects Test . . . . . . . . . . . . . . . . . . . . . . . 15
4 Results and Discussions 17
5 Conclusion 21
List of Tables
1 Descriptive Statistics for Government Debt . . . . . . . . . . . . . . . . . 25
2 Descriptive Statistics for Private Capital . . . . . . . . . . . . . . . . . . 25
3 Descriptive Statistics for Public Capital . . . . . . . . . . . . . . . . . . . 26
4 LLC Unit Root Test Results . . . . . . . . . . . . . . . . . . . . . . . . . 26
5 Granger Causality Test Results-Dumitrescu-Hurlin . . . . . . . . . . . . 26
6 Random Effects Model Results . . . . . . . . . . . . . . . . . . . . . . . . 27
7 Fixed effect model Results . . . . . . . . . . . . . . . . . . . . . . . . . . 27
List of Figures
1 Link between government debt, private and public capital . . . . . . . . 28

Acemoglu, D., & Restrepo, P. (2017). Secular stagnation? the effect of aging on economic
growth in the age of automation. American Economic Review, 107 (5), 174–79.
Amna Intisar, R., Yaseen, M. R., Kousar, R., Usman, M., & Makhdum, M. S. A. (2020).
Impact of trade openness and human capital on economic growth: a comparative investigation of asian countries. Sustainability, 12 (7), 2930.
Aschauer, D. A. (1989). Is public expenditure productive? Journal of monetary economics, 23 (2), 177–200.
Baier, S. L., & Glomm, G. (2001). Long-run growth and welfare effects of public policies
with distortionary taxation. Journal of Economic Dynamics and control, 25 (12), 2007–
2042.
Cipriani, G. P. (2014). Population aging and payg pensions in the olg model. Journal of
population economics, 27 (1), 251–256.
Dumitrescu, E.-I., & Hurlin, C. (2012). Testing for granger non-causality in heterogeneous
panels. Economic modelling, 29 (4), 1450–1460.
Farmer, K., & Zotti, J. (2010). Sustainable government debt in a two-good, two-country
overlapping generations model (Vol. 57) (No. 3). Springer.
Ferreira, M. C. (2009). Public debt and economic growth: a granger causality panel data
approach. Not Stated.
Gertler, M. (1999). Government debt and social security in a life-cycle economy. In
Carnegie-rochester conference series on public policy (Vol. 50, pp. 61–110).
Granger, C. W. (1969). Investigating causal relations by econometric models and crossspectral methods. Econometrica: journal of the Econometric Society, 424–438.
Greene, W. (2008). Econometric analysis. 6th (ed.) prentice hill publishing. Upper Saddle
River .
Heer, B., Heer, & Bihn. (2019). Public economics. Springer.
Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic
and finite-sample properties. Journal of econometrics, 108 (1), 1–24.
Lin, S. (1994). Government debt and the real exchange rate in an overlapping generations
model. Journal of Economic Integration, 94–105.
Lopez, L., & Weber, S. (2017). Testing for granger causality in panel data. The Stata
Journal, 17 (4), 972–984.
Mabula, S., & Mutasa, F. (2019). The effect of public debt on private investment in
tanzania. African Journal of Economic Review, 7 (1), 109–135.
Maddala, G., Li, H., & Srivastava, V. K. (2001). A comparative study of different
shrinkage estimators for panel data models. Annals of Economics and Finance, 2 (1),
1–30.
Makuyana, G., & M Odhiambo, N. (2019). Public and private investment and economic
growth in malawi: an ardl-bounds testing approach. Economic research-Ekonomska
istraˇzivanja, 32 (1), 673–689.
McCallum, B. T. (1984). Are bond-financed deficits inflationary? a ricardian analysis.
Journal of political economy, 92 (1), 123–135.
McCann, P. (2001). Urban and regional economics. OUP Catalogue.
Oshikoya, T. W. (1994). Macroeconomic determinants of domestic private investment
in africa: An empirical analysis. Economic development and cultural change, 42 (3),
573–596.
Paramati, S. R., Ummalla, M., & Apergis, N. (2016). The effect of foreign direct investment and stock market growth on clean energy use across a panel of emerging market
economies. Energy Economics, 56 , 29–41.
Pereira, A. M., & Andraz, J. M. (2005). Public investment in transportation infrastructure and economic performance in portugal. Review of Development Economics, 9 (2),
177–196.
Rasmussen, B. S. (2000). Government debt and capital accumulation in the blanchardcass-yaari olg model (Vol. 14).
Sapir, A. (2020). High public debt in the euro area: A tale of belgium and italy. JCMS:
Journal of Common Market Studies, 58 (3), 672–687.
Torres-Reyna, O. (2007). Panel data analysis fixed and random effects using stata (v.
4.2). Data & Statistical Services, Priceton University, 112 .
Yien, L. C., Abdullah, H., & Azam, M. (2017). Granger causality analysis between
inflation, debt and exchange rate: Evidence from malaysia. International journal of
academic research in accounting, finance and management sciences, 7 (1), 189–196.