Credit-financed household consumption and the debt service ratio: tackling endogenous autonomous demand in the supermultiplier model

We develop a supermultiplier model where debt-financed household autonomous consumption drives growth. We assume autonomous consumption growth to be partially endogenous depending on households’ debt service ratio. We define a consumption function that allows for: (i) workers’ demand for credit to depend on the burden interest payments have on their income and for (ii) credit conditions to affect the pace of household expenditures. The model has two equilibria, with the steady state one (two) combining a lower (higher) household debt ratio with a higher (lower) growth rate. However, only the steady state one is locally stable for the chosen set of parameters. After an external percentage shock to the first steady state, the system converges back to it. We find that the wage share has a positive effect, while the interest rate has a negative effect on the steady state growth path. These results show that the supermultiplier model can account for the permanent effects of both real and financial variables on the long-run growth rate.

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Publication Details

Journal
Review of Keynesian Economics
Published
2024-08-30
DOI
https://doi.org/10.4337/roke.2024.0003
Primary Topic
Economic Theory and Policy
Type
article
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article

Credit-financed household consumption and the debt service ratio: tackling endogenous autonomous demand in the supermultiplier model

Lídia Brochier, Joana David Avritzer
Review of Keynesian Economics
Economic Theory and Policy
article

Credit-financed household consumption and the debt service ratio: tackling endogenous autonomous demand in the supermultiplier model

Lídia Brochier, Joana David Avritzer
article en

Abstract

We develop a supermultiplier model where debt-financed household autonomous consumption drives growth. We assume autonomous consumption growth to be partially endogenous depending on households’ debt service ratio. We define a consumption function that allows for: (i) workers’ demand for credit to depend on the burden interest payments have on their income and for (ii) credit conditions to affect the pace of household expenditures. The model has two equilibria, with the steady state one (two) combining a lower (higher) household debt ratio with a higher (lower) growth rate. However, only the steady state one is locally stable for the chosen set of parameters. After an external percentage shock to the first steady state, the system converges back to it. We find that the wage share has a positive effect, while the interest rate has a negative effect on the steady state growth path. These results show that the supermultiplier model can account for the permanent effects of both real and financial variables on the long-run growth rate.

Review of Keynesian EconomicsVol. 13(1)
Universidade Federal do Rio de Janeiro (BR), Connecticut College (US)
Openalex Percentile: Top 74%
Economic Theory and Policy
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