Components of autonomous demand growth and financial feedbacks: Implications for growth drivers and growth regime analysis

By Ryan Woodgate, Eckhard Hein, Ricardo Summa

PKES Working Paper 2307

May 2023

Since autonomous demand has to be financed independently of income from current production, this paper starts with the requirement that autonomous demand-led growth models have to include endogenous money and credit, and hence financial dynamics. It then seeks to make two contributions. First, we show that the inclusion of financial stock-flow interactions in a simple closed economy autonomous demand-led growth model provides an endogenous mechanism which, under certain conditions, aligns two autonomous growth rates, as a requirement for long-run equilibrium. Second, using that model, we prove that the relative size of autonomous growth contributions may be misleading as a guide to classify growth regimes if autonomous growth rates are interdependent, both for the steady state growth equilibrium as well as for the traverse towards this equilibrium. Furthermore, we show that the relative growth contributions are economic policy contingent. Therefore, in Sraffian supermultiplier demand-led growth decomposition exercises, interdependencies between autonomous growth components should not be ignored when growth drivers are supposed to be identified, both in medium- to long-run growth regime analysis, as well as in the analysis of autonomous drivers of short-run cycles.

Keywords: Sraffian supermultiplier and endogenous credit, two autonomous growth drivers, demand-led growth accounting, growth regimes

JEL classification: E11 E12 E20 E62