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: Connecticut College

PSL Quarterly Review, 2022, vol. 75, issue 302, 241-262

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.

Keywords: household debt dynamics; debt-financed consumption; growth; financial fragility (search for similar items in EconPapers)
JEL-codes: E11 E12 E21 O41 (search for similar items in EconPapers)
Date: 2022
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