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Chapter 14: Inside Debt and Economic Growth: A Neo-Kaleckian Analysis
Thomas I. Palley 1 Introduction: inside debt, macroeconomics and growth Recently, there has been a surge of interest in the economic effects of inside (private sector) debt owing to rising indebtedness in many countries. The current chapter explores the effects of inside debt on economic growth within a neo-Kaleckian framework.1 The foundation of the neo-Kaleckian framework is the model of economic growth developed by such authors as Rowthorn (1982), Taylor (1983) and Dutt (1984, 1990). In these models growth is determined by the rate of capital accumulation, which depends on the profit rate and the rate of capacity utilization. That core model is then supplemented by a model of income distribution in which the profit share and rate of profit depend on the rate of capacity utilization (Lavoie, 1995). After long being ignored, inside debt effects have become a major focus of interest in macroeconomics. One strand of literature explores Fisher’s (1933) debt-deflation theory of depressions, whereby debt causes price level reductions and deflation to be destabilizing (Tobin, 1980; Caskey and Fazzari, 1987; Palley, 1991–92, 1996, 1997a, 1999, 2008a, 2008b).2 A second strand of literature concerns the effect of inside debt on the business cycle. Most of this literature has focused on the effect of corporate debt, which creates balance sheet congestion that limits investment spending. This congestion mechanism applies to both Keynesian (Gallegati and Gardini, 1991; Jarsulic, 1989; Semmler and Franke, 1991; Skott, 1994) and new Keynesian models (Bernanke et al., 1996, 1999; Kiyotaki and Moore, 1997)...
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