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Debt-led growth and its financial fragility: An investigation into the dynamics of a supermultiplier model

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  • Joana David Avritzer

    (Connecticut College)

Abstract

This paper discusses the financial sustainability of demand-led growth models. We assume a supermultiplier growth model in which household consumption is the autonomous component of demand that drives growth and we discuss the financial sustainability of such dynamics of growth from the perspective of worker households. We show that, for positive rates of growth, the model converges to an equilibrium where worker households are accumulating debt and not wealth. We also show that, when the economy is growing at a rate that is positive but not too high, the model also implies that households will not be able to service their debt at the point of full long-run equilibrium. We then conclude that this household debt-financed consumption pattern of economic growth generates an internal dynamic that leads to financial instability.

Suggested Citation

  • Joana David Avritzer, 2022. "Debt-led growth and its financial fragility: An investigation into the dynamics of a supermultiplier model," PSL Quarterly Review, Economia civile, vol. 75(302), pages 241-262.
    • Handle: RePEc:psl:pslqrr:2022:32
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    More about this item

    Keywords

    household debt dynamics; debt-financed consumption; growth; financial fragility;
    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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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