Stability issues in Kaleckian models driven by autonomous demand growth—Harrodian instability and debt dynamics

Sraffian supermultiplier models, as well as Kaleckian distribution and growth models that make use of non‐capacity creating autonomous demand growth to cope with Harrodian instability, have paid little attention to the financial side of autonomous demand growth as the driver of the system. Therefore, we link the issue of Harrodian instability in Kaleckian models driven by non‐capacity creating autonomous demand growth with the associated financial dynamics. For a simple model with autonomous government expenditure growth, zero interest rates and no consumption out of wealth, we find that adding debt dynamics does not change the results obtained by Skott (2017) based on Lavoie's (2016) model without debt, each published in this journal. Hence, in this simple model, the long‐run equilibrium is stable if Harrodian instability is not too strong and the autonomous growth rate does not exceed a maximum given by the long‐run equilibrium saving rate. Introducing interest payments on government debt as well as consumption out of wealth into the model, however, changes the stability requirements: First, the autonomous growth rate of government expenditures should not fall short of the exogenous monetary interest rate. Second, this growth rate should not exceed a maximum given by the saving rate in the long‐run equilibrium net of the propensity to consume out of wealth. Third, Harrodian instability may be almost as strong as in the simple model without violating long‐run overall stability, particularly if the propensity to consume out of wealth is low. We claim that irrespective of the relevance or irrelevance of Harrodian instability, it is necessary to introduce financial variables into models driven by non‐capacity creating autonomous demand in order to assess the long‐run (in‐)stability and sustainability of growth.