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Long-run consequences of debt

  • Siyan Chen
  • Saul Desiderio
Regular Article
  • 113 Downloads

Abstract

Empirical evidence suggests that both public and private debt may have long-run detrimental effects on the economy. However, theoretical works have not provided a unique explanation to the issue. In this paper, therefore, we propose a framework that is able to describe the long-run effects of different kinds of debt. We introduce a stock-flow consistent dynamic model where the economy is represented as a network of trading relationships among agents. Debt contracts are one of such relationships. The model is characterized by a unique and stable steady-state and predicts that: (i) aggregate income is always limited from the above by the money supply; (ii) debts cause in the long-run a redistribution of borrowers’ wealth and income in favor of lenders; (iii) the redistribution is magnified by the level of the interest rate and (iv) by the degree of debt persistence. In the aggregate this may also lower the average marginal propensity to spend and nominal income, providing therefore a clear-cut explanation to the empirical evidence.

Keywords

Debt Wealth distribution Networks Stock-flow consistency Dynamic systems 

JEL Classification

C61 D31 E21 E51 G01 

Notes

Acknowledgements

This work is financially supported by the STU Scientific Research Foundation for Talents under Grant No. NTF12013 and No. NTF12014, and by the Foundation for Young Talents in Higher Education of Guangdong, China, under Grant No. 2014WQNCX055. The authors wish to thank the editor and two anonymous referees for their helpful comments. In addition, Saul Desiderio would like to thank Davide Dottori and Alberto Russo for comments on earlier drafts of the paper.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.Business SchoolShantou UniversityShantouPeople’s Republic of China

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