Credit-Financed Household Consumption and the Debt Service Ratio: Tackling Endogenous Autonomous Demand in the Supermultiplier Model

47 Pages Posted: 17 Aug 2022

See all articles by Joana David Avritzer

Joana David Avritzer

Connecticut College

Lídia Brochier

Universidade Federal do Rio de Janeiro (UFRJ) - Institute of Economics

Abstract

We develop a Supermultiplier model where debt-financed household autonomous consumption drives growth. However, instead of taking autonomous consumption growth as exogenous we assume that households’ debt service ratio partially determines it. We define a consumption function that allows for: (i) households’ demand for credit to depend on the burden interest payments have on their income; and (ii) credit conditions to affect the pace of household expenditures. The model has two equilibria, with steady state one (two) combining a lower (higher) household debt ratio with a higher (lower) growth rate. Both equilibria are locally stable for the chosen set of parameters, yet the system converges to the first steady state. Real and financial variables affect the steady state growth path in the model. Wage share and firms’ propensity to invest positively affect growth, while the interest rate has a negative effect.

Keywords: demand-led growth, Supermultiplier, household debt, consumption, endogenous autonomous demand

Suggested Citation

David Avritzer, Joana and Brochier, Lídia, Credit-Financed Household Consumption and the Debt Service Ratio: Tackling Endogenous Autonomous Demand in the Supermultiplier Model. Available at SSRN: https://ssrn.com/abstract=4192546 or http://dx.doi.org/10.2139/ssrn.4192546

Joana David Avritzer (Contact Author)

Connecticut College ( email )

New London, CT 06320
United States

Lídia Brochier

Universidade Federal do Rio de Janeiro (UFRJ) - Institute of Economics ( email )

Rio de Janeiro, 22290-240
Brazil
+5521990532399 (Phone)

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