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The Supermultiplier-Cum-Finance. Economic Limits of a Credit Driven System

Author

Listed:
  • Dejuán, Óscar

    (University of Castilla – La Mancha (UCLM))

  • McCombie, John S.L.

    (University of Cambridge, Cambridge, UK)

Abstract

Credit explosion, debt overhang and asset bubbles, of the size observed in the period 1995-2008, have been a recurrent problem of advanced capitalism. In this paper we analyse the causes and consequences of over-indebtedness from a supermultiplier model that takes into account the debt-service. We contend that the accelerator of investment is a stable and stabilizing mechanism when investment depends on the expected increases in “permanent” demand. The problems of instability are rooted in the consumption-multiplier when it does not depend on fixed parameters (like the tax rate) but on coefficients that evolve endogenously; namely the debt-burden and the debt service. To control the financial sources of this instability, monetary authorities should prevent that credit rises systematically above the growth of nominal GDP.

Suggested Citation

  • Dejuán, Óscar & McCombie, John S.L., 2018. "The Supermultiplier-Cum-Finance. Economic Limits of a Credit Driven System," Centro Sraffa Working Papers CSWP32, Centro di Ricerche e Documentazione "Piero Sraffa".
    • Handle: RePEc:ris:sraffa:0032
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    Cited by:

    1. Óscar Dejuán, 2019. "Kaldor after Sraffa," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(1), pages 1-19, June.

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    More about this item

    Keywords

    Financial Instability; Supermultiplier; Post-Keynesian Economics; Sraffian Economics;
    All these keywords.

    JEL classification:

    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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