IDEAS home Printed from https://ideas.repec.org/p/tri/wpaper/1010.html
   My bibliography  Save this paper

The Macrodynamics of Household Debt

Author

Listed:
  • 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.

Suggested Citation

  • Yun Kim & Alan Isaac, 2010. "The Macrodynamics of Household Debt," Working Papers 1010, Trinity College, Department of Economics.
  • Handle: RePEc:tri:wpaper:1010
    as

    Download full text from publisher

    File URL: http://internet2.trincoll.edu/repec/WorkingPapers2010/wp10-10.pdf
    File Function: First version, 2010
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Laura Carvalho & Corrado Di Guilmi, 2014. "Income inequality and macroeconomic instability: a stock-flow consistent approach with heterogeneous agents," CAMA Working Papers 2014-60, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Corrado Di Guilmi & Laura Carvalho, 2015. "The dynamics of leverage in a Minskyan model with heterogenous firms," Working Paper Series 28, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    3. repec:eee:jeborg:v:140:y:2017:i:c:p:70-90 is not listed on IDEAS
    4. Di Guilmi, Corrado & Carvalho, Laura, 2017. "The dynamics of leverage in a demand-driven model with heterogeneous firms," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 70-90.

    More about this item

    Keywords

    Corporate debt; Consumer debt; Dynamics; Instability;

    JEL classification:

    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tri:wpaper:1010. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joshua Stillwagon). General contact details of provider: http://edirc.repec.org/data/edtrius.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.