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Does Public Debt Impair Total Factor Productivity?

Author

Listed:
  • Grégory Donnat

    (Université Côte d'Azur, CNRS, GREDEG, France)

  • Maxime Menuet

    (Université Côte d'Azur, CNRS, GREDEG, France)

  • Alexandru Minea

    (LEO, University of Orleans, France
    Carleton University, Canada)

  • Patrick Villieu

    (LEO, University of Orleans, 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.

Suggested Citation

  • Grégory Donnat & Maxime Menuet & Alexandru Minea & Patrick Villieu, 2025. "Does Public Debt Impair Total Factor Productivity?," GREDEG Working Papers 2025-26, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2025-26
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    More about this item

    Keywords

    Total factor productivity; Endogenous growth; Public debt;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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