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The Macrodynamics of Household Debt

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  • Yun Kim

    ()
    (Department of Economics, Trinity College)

  • Alan Isaac

    ()
    (Department of Economics, American University)

Abstract

Recent research finds that corporate leverage affects macroeconomic dynamics and can contribute to financial fragility. We show that consumer debt is also important. We add consumer debt to a stock-flow consistent neo-Kaleckian growth model and explore the macrodynamic ramifications. Consumer debt influences effective demand, the profit rate, and economic growth. Unsurprisingly, laxer consumer credit constraints stimulate growth in the short run. However, the long-run effects may be growth reducing. Looser consumer credit can also make the system more vulnerable to changes in the state of confidence, the interest rate, and the saving propensity of rentiers. When consumer debt levels are high, a small increase in the interest rate or increase in the rentiers’s saving propensity, or reduction in the state of confidence can destabilize the macroeconomy. We further extend the model endogenizing the retention ratio. We find that the model becomes structurally unstable. This allows a simple characterization of economic crisis: a downswing in the state of confidence destabilize the macroeconomy. We also observe that higher interest rates and more prudent behavior of rentiers can be destabilizing.

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File URL: http://internet2.trincoll.edu/repec/WorkingPapers2010/wp10-10.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1010.

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Length: 44 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:tri:wpaper:1010

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Keywords: Corporate debt; Consumer debt; Dynamics; Instability;

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