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

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