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Debt Servicing, Aggregate Consumption, and Growth

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  • Mark Setterfield

    ()
    (Department of Economics, Trinity College)

  • Yun Kim

    ()
    (Department of Economics, Trinity College)

Abstract

We develop a neo-Kaleckian growth model that emphasizes the importance of consumption behavior. In our model, workers first make consumption decisions based on their gross income, and then treat debt servicing commitments as a substitute for saving. Workers' borrowing is induced by their desire to keep up with the consumption standard set by rentiers' consumption, reflecting an aspect of the relative income hypothesis. As a result of this consumption and debt servicing behavior, consumer debt accumulation and income distribution have effects on aggregate demand, profitability, and economic growth that differ from those found in existing models. We also investigate the financial sustainability of the Golden Age and Neoliberal growth regimes within our framework. It is shown that distributional changes between the Golden Age and the Neoliberal regimes, together with corresponding changes in consumption emulation behavior via expenditure cascades, suffice to make the Neoliberal growth regime unsustainable.

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File URL: http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-16.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1316.

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Length: 33 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:tri:wpaper:1316

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Related research

Keywords: Consumer debt; emulation; income distribution; Golden Age regime; Neoliberal regime; expenditure cascades; growth;

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  1. Jakob Kapeller & Bernhard Schütz, 2012. "Conspicuous consumption, inequality and debt: The nature of consumption-driven profit-led regimes," Economics working papers 2012-13, Department of Economics, Johannes Kepler University Linz, Austria.
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Cited by:
  1. Mark Setterfield, 2013. "Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities," Working Papers 1320, Trinity College, Department of Economics.

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