Effects of government indebtedness on productivity dynamics: Long-run evidence from an emerging economy

Abstract

This paper investigates the long-run relationship between public indebtedness and economic efficiency, identifying the debt-to-GDP ratio as a critical determinant of Total Factor Productivity (TFP). Using Brazil as a case study of a volatile emerging economy, the findings suggest that improvements in public debt indicators are accompanied by productivity gains, contingent upon different regimes and control specifications. Furthermore, the analysis reveals a potential virtuous cycle in the short run, where positive productivity shocks contribute to fiscal gains, thereby strengthening the government's budgetary position. Overall, the results indicate that credible fiscal consolidation can contribute to bolstering total factor productivity levels, particularly under a regime of declining indebtedness.