Household credit-financed consumption and the debt service ratio: tackling endogenous autonomous demand in the Supermultiplier model

By Joana David Avritzer, Lídia Brochier

PKES Working Paper 2219

August 2022

The paper develops a Supermultiplier model where household debt-financed consumption is the autonomous component of demand driving growth. However, instead of taking autonomous consumption growth as exogenous - as usually done in canonical Supermultiplier models - we assume households’ debt service ratio partially determines it. More precisely, we define a consumption function that captures: (i) the fact that households’ demand for credit may depend on the burden interest payments have on their income (wages) and (ii) that credit conditions may also affect the pace of household expenditures. There are two equilibria in the model: one with a lower debt ratio and higher growth rate; and the other with a higher debt ratio and lower growth rate. Both equilibria are locally stable for the chosen set of parameters, yet the system converges to the steady state with a lower household debt ratio and higher growth rate. Both real and financial variables affect the steady growth path in the model, with the wage share and firms’ propensity to invest having a positive effect on growth while the interest rate has a negative one.

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

JEL classification: B50 C61 E11 G15 O41