The Supermultiplier-Cum-Finance. Economic Limits of a Credit Driven System

CSWP 32 (July 2018)

Author Óscar Dejuán and John S.L. McCombie

Keywords Financial Instability; Supermultiplier; Post-Keynesian Economics, Sraffian Economics

JEL E11; E12; E32

Credit explosion, debt overhang and asset bubbles, of the size observed in the period 1995-2008, have been a recurrent problem of advanced capitalism. In this paper we analyse the causes and consequences of over-indebtedness from a supermultiplier model that takes into account the debt-service. We contend that the accelerator of investment is a stable and stabilizing mechanism when investment depends on the expected increases in “permanent” demand. The problems of instability are rooted in the consumption-multiplier when it does not depend on fixed parameters (like the tax rate) but on coefficients that evolve endogenously; namely the debt-burden and the debt service. To control the financial sources of this instability, monetary authorities should prevent that credit rises systematically above the growth of nominal GDP.

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