Debt hierarchy: Autonomous demand composition, growth and indebtedness in a Supermultiplier model

Abstract

In Supermultiplier models, autonomous demand drives growth, and business investment is induced by income, responding to the capital stock adjustment principle in the long run. As the financial side of these models needs further development, we build a stock-flow consistent (SFC) Supermultiplier model with two sources of debt-financed autonomous demand (government and household consumption), stressing the interplay between households, firms, and government indebtedness and growth. We explore (a) the model’s stability conditions and their relation to real and financial variables and (b) autonomous demand growth and composition effects over debt-to-output ratios, mainly in the long run. Results show that (i) the model generates financial instability scenarios; (ii) government expenditures may stabilise households’ indebtedness. We should rethink the role of fiscal policy, focusing on its potential to stabilise private debt.