Debt-credit flows and stocks in a Supermultiplier model with two autonomous demand components: Consequences for growth

Allain (2022) raised the question of how two or more non-capacity-generating autonomous demand components growing at different rates may coexist in the supermultiplier, avoiding that one component absorbs all the others in the long-run steady-state. To date, the theoretical shortcut adopted in the literature has been to assume that, at least as long-term averages, the different components grow at the same rate or that institutional elements kick in to tackle this issue. Differently, we propose a solution that resorts to endogenous feedback effects and stock-flow consistent relations to solve such issue. More specifically, we build a simple supermultiplier model in which growth is driven by workers’ debt accumulation as well as rentiers’ consumption out of interest. We show that, according to specific conditions, there is a steady-state solution in which growth ultimately converges towards that of the fastest growing component, but the other does not disappear due to the presence of the mentioned endogenous stock-flow relations. This provides a way out to the two-component issue, with endogenous money creation surrounding this process of growth driven by credit provided to households.