Components of Autonomous Demand Growth and Financial Feedbacks: Implications for Growth Drivers and Growth Regime Analysis

This paper presents a simple closed-economy model that is driven by the growth of two autonomous components of demand, namely government spending and rentiers’ consumption out of interest income. Using this model, it seeks to make two contributions. First, by focusing on the financial dynamics that arise from debt-financed government spending, we show that an underlying stock-flow interaction provides an endogenous mechanism which, under certain conditions, aligns the two autonomous growth rates in the long run. Hence, an economy can be driven by two autonomous components of demand, without one dominating the other in the long-run nor without policy changes being required to align the two growth drivers. Second, we prove that if two autonomous demand components are dynamically interdependent, then the relative size of their growth contributions may be misleading as a guide to classify growth regimes, both in the long-run equilibrium as well as during the traverse towards this equilibrium. Furthermore, we show that the relative growth contributions are economic policy contingent. We thus argue that interdependencies between autonomous growth components arising from financial stock-flow interactions should not be ignored in Sraffian supermultiplier growth decomposition exercises that aim to identify underlying growth drivers.