Debt servicing, aggregate consumption, and growth

• Realistic household consumption and saving behaviors in a neo-Kaleckian growth model.
• Model incorporates consumption emulation and household borrowing.
• Increased debt servicing shown to generate a higher growth in the short run.
• Distributional changes shown to make Neoliberal growth regime unsustainable.
• Who households emulate affects the sustainability of a growth regime.

We develop a neo-Kaleckian growth model that emphasizes the importance of consumption behavior. In our model, workers first make consumption decisions based on their gross income, and then treat debt servicing commitments as a substitute for saving. Workers’ borrowing is induced by their desire to keep up with the consumption standard set by rentiers’ consumption, reflecting an aspect of the relative income hypothesis. As a result of this consumption and debt servicing behavior, consumer debt accumulation and income distribution have effects on aggregate demand, profitability, and economic growth that differ from those found in existing models. We also investigate the financial sustainability of the Golden Age and Neoliberal growth regimes within our framework. It is shown that distributional changes between the Golden Age and the Neoliberal regimes, together with corresponding changes in consumption emulation behavior via expenditure cascades, suffice to make the Neoliberal growth regime unsustainable.