Does Public Debt Impair Total Factor Productivity?

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.