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

Joana David Avritzer ()
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Joana David Avritzer: Department of Economics, Connecticut College and IRID-UFRJ

No 2106, Working Papers from New School for Social Research, Department of Economics

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 discuss the financial sustainability of such dynamics of growth from the perspective of the working 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, and between 2% and 4.4%, the dynamics of 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.

Keywords: Household debt dynamics; debt-financed consumption; growth and financial fragility (search for similar items in EconPapers)
JEL-codes: E11 E12 E21 O41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2021-03
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-pke
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http://www.economicpolicyresearch.org/econ/2021/NSSR_WP_062021.pdf First version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:2106

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