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Inside Debt and Economic Growth: A Cambridge - Kaleckian Analysis

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Author Info
Thomas I. Palley () (Economics for Democratic & Open Societies, Washington DC)
Abstract

Inside debt is a fundamental feature of capitalist economies. This paper examines the growth effects of consumer and corporate debt using a Cambridge - Kaleckian growth framework. According to the Cambridge - Kaleckian model inside debt has an ambiguous effect on growth. This is counter to the intuition of static short-run macro models in which higher debt levels lower economic activity and shows intuitions derived from short run macroeconomics do not always carry over to growth theory. Growth is faster in endogenous money economies than in pure credit economies, ceteris paribus. That is because lending in endogenous money economies creates money wealth that increases spending and lowers saving. Interest payments from debtors to creditors are a critical channel whereby debt affects growth. In the consumer debt model this interest transfer mechanism exerts a negative influence on growth. However, in the corporate debt model the transfer can raise growth if the marginal propensity to consume of creditor households exceeds the marginal propensity to invest of firms.

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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 02-2009.

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Length: 31 pages
Date of creation: 2009
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Handle: RePEc:imk:wpaper:2-2009

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Related research
Keywords: Growth; Debt; Interest transfers; Cambridge distribution theory; Kaleckian growth theory.;

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Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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  2. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation, Yale University. [Downloadable!]
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  5. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation, Yale University. [Downloadable!]
  6. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  7. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December. [Downloadable!] (restricted)
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  8. Palley, Thomas I., 2008. "Keynesian models of deflation and depression revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 167-177, October. [Downloadable!] (restricted)
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  10. Palley, Thomas I, 1996. "Inside Debt, Aggregate Demand, and the Cambridge Theory of Distribution," Cambridge Journal of Economics, Oxford University Press, vol. 20(4), pages 465-74, July.
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  12. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June. [Downloadable!] (restricted)
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