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The role of debt in aggregate demand

Author

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  • Xing, Xiaoyun
  • Xiong, Wanting
  • Guo, Jinzhong
  • Wang, Yougui

Abstract

With the purpose of performing a simple and original analysis on the mechanisms through which money and debt affect aggregate demand, this paper presents a stock-flow-consistent model in which the role of credit creation of banks is emphasized. By conducting theoretical analysis on income determination in an alternative way, we demonstrate that the equilibrium national income can be expressed as flows generated from three sources, namely money circulation, private debt circulation, and total credit expansion.

Suggested Citation

  • Xing, Xiaoyun & Xiong, Wanting & Guo, Jinzhong & Wang, Yougui, 2021. "The role of debt in aggregate demand," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612320305456
    DOI: 10.1016/j.frl.2020.101653
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    1. Xing, Xiaoyun & Pan, Huanxue & Deng, Jing, 2022. "Carbon tax in a stock-flow consistent model: The role of commercial banks in financing low-carbon transition," Finance Research Letters, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Aggregate demand; Money circulation; Credit expansion; Stock-flow consistent approach;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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