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Debt and demand regimes in canonical growth models: a comparison of neo-Kaleckian and Supermultiplier models

Brochier, Lidia and Freitas, Fábio (2019): Debt and demand regimes in canonical growth models: a comparison of neo-Kaleckian and Supermultiplier models.

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Abstract

The paper addresses the features of stock-flow consistent (SFC) canonical versions of neo-Kaleckian (NK) and Supermultiplier (SM) models that introduce either the accumulation of debt of households or firms. The aim of this comparison is twofold: (i) to analyze the implications of a debt accumulation process in each of these models; (ii) to evaluate the extent to which these debt accumulation processes differ due to each model's specific closure. For that purpose, we investigate the relation of debt ratios, demand, and growth, focusing on the conditions for the paradox of debt to arise in each model; and the stability conditions of firms' and household debt ratios. Results suggest that not only the paradox of debt in the firms' sector is not a necessary result of SM models, but the Minskyan debt regime is the sole economically viable one in the long-run. For the NK model, as extensively explored in the literature, firms' leverage ratio can be either pro-cyclical or anti-cyclical. About the demand regimes, in this canonical version of the SM model, firms' debt has no direct effect on demand; as for the NK model, demand can be either debt-led or debt-burdened. As for the household sector, the paradox of debt is a feature of the canonical Supermultiplier model in the long run, yet there may be episodes of rising debt-to-income ratios and financial crises as precipitated by policy decisions. Besides, only the debt-led demand regime is compatible with a stable household debt ratio. In turn, in the neo-Kaleckian model, results are ambiguous in what concerns the two-way relation between demand and household debt.

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