A baseline supermultiplier model for the analysis of fiscal policy and government debt

Abstract

The article presents a basic Sraffian supermultiplier model for the analysis of fiscal policy and government debt. First, we discuss the assumptions and the equilibrium and stability properties of the model. Next, we investigate the effects on the main endogenous variables of the model (including the primary government deficit and debt ratios) of changes in the rate of growth and composition of autonomous demand, in the tax rates on profits and wages, and in the rate of interest. The analysis of the impacts of changes in the interest rate is conducted according to two possible closures for the Classical/Sraffian theory of income distribution. In the first closure the changes in the rate of interest do not affect income distribution between wages and profits, which implies that its influence over the endogenous variables operates only through the financial component of total government deficit. The second closure is the monetary theory of distribution, according to which there is an inverse relationship between the rate of interest and the wage share. In this case, besides the pure financial effect, we show that the change in the rate of interest affects the economy through the equilibrium value of the supermultiplier and the tax burden.