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. We assume autonomous consumption growth to be partially endogenous depending on households’ debt service ratio. We define a consumption function that allows for: (i) workers’ demand for credit to depend on the burden interest payments have on their income and for (ii) credit conditions to affect the pace of household expenditures. The model has two equilibria, with the steady state one (two) combining a lower (higher) household debt ratio with a higher (lower) growth rate. However, only the steady state one is locally stable for the chosen set of parameters. After an external percentage shock to the first steady state, the system converges back to it. We find that the wage share has a positive effect, while the interest rate has a negative effect on the steady state growth path. These results show that the supermultiplier model can account for the permanent effects of both real and financial variables on the long-run growth rate.