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Debt Puzzle: A Comparative Analysis of Public Debt’s Impact on Production Efficiency across OECD Countries

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  • Usama R. Al-qalawi

    (Department of Economics, Business School, The Hashemite University, Zarqa 13133, Jordan)

  • Arqam Al-Rabbaie

    (Department of Economics, Business School, The Hashemite University, Zarqa 13133, Jordan)

Abstract

Debt is a fundamental component of modern economic systems. It serves as a source of financing for government, business, and individual projects. Many earlier studies concentrated on the direct relationship between debt and economic performance using different econometric methodologies. This work investigates the effect of debt on production efficiency, extracted from the estimated production function. Unlike previous econometric approaches, we employ a production stochastic frontier analysis (SFA) on data for 18 OECD countries spanning from Quarter 1, 2015, to Quarter 3, 2021, to capture the short-run effect of debt on the production efficiency and, thus, output growth. The results show that, in the short run, as debt increases by $1 billion, efficiency increases by 0.04%. Additionally, we found that the most indebted countries are the most efficient countries. In our sample, those were the UK and France. Furthermore, the average efficiency for the 18 OECD countries was 70.07.

Suggested Citation

  • Usama R. Al-qalawi & Arqam Al-Rabbaie, 2024. "Debt Puzzle: A Comparative Analysis of Public Debt’s Impact on Production Efficiency across OECD Countries," Economies, MDPI, vol. 12(7), pages 1-13, June.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:7:p:161-:d:1422140
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    References listed on IDEAS

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    3. Checherita-Westphal, Cristina & Rother, Philipp, 2012. "The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area," European Economic Review, Elsevier, vol. 56(7), pages 1392-1405.
    4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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