Does Public Debt Impair Total Factor Productivity?

Grégory Donnat, Maxime Menuet, Alexandru Mine and Patrick Villieu
Additional contact information
Grégory Donnat: Université Côte d'Azur, CNRS, GREDEG, France
Alexandru Mine: LEO, University of Orleans, France
Patrick Villieu: LEO, University of Orleans, France

No 2025-26, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: What explains the persistent slowdown in total factor productivity (TFP) growth across advanced economies? This paper identifies rising public debt as a key structural driver. Using a panel of 25 OECD countries from 1980 to 2019, we provide robust empirical evidence that sustained debt accumulation has significantly contributed to the TFP deceleration, consistent with a hysteresis mechanism whereby temporary fiscal shocks leave long-lasting scars on productivity levels. To account for this evidence, we develop a theoretical model grounded in a stochastic endogenous growth setup. In the deterministic equilibrium, higher public debt ratios reduce TFP growth via a long-run crowding-out effect. In the stochastic setting, we uncover a new procyclical amplification mechanism, whereby debt adjustments amplify fluctuations in TFP. Our model reproduces the observed negative correlation between cyclical components of public debt and TFP without relying on persistent exogenous shocks, offering a novel perspective on the drivers of the productivity slowdown.

Keywords: Total factor productivity; Endogenous growth; Public debt (search for similar items in EconPapers)
JEL-codes: E62 H62 O41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2025-07
New Economics Papers: this item is included in nep-fdg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://195.220.190.85/GREDEG-WP-2025-26.pdf First version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gre:wpaper:2025-26

Access Statistics for this paper

More papers in GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France Contact information at EDIRC.
Bibliographic data for series maintained by Patrice Bougette ().