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862. Growth led by government expenditure and exports: public and external debt stability in a supermultiplier model

Working Papers n.862 - Ottobre 2021

Guilherme Spinato Morlin

PhD Student at the Department of Economics and Statistics, University of Siena


The Sraffian supermultiplier model revealed the role of autonomous demand in economic growth. Nevertheless, the long-run sustainability of a growth process driven by autonomous demand requires the stability of the financial stocks behind it. Growth led by government expenditure and exports is thus stable if both public and external debts present convergent dynamics. Thus, in this paper, we develop a supermultiplier model for an open economy with government to assess the stability of growth led by government expenditure and exports. We analyze the stability conditions for public debt and foreign debt ratios. Public debt-to-income ratio stability requires that the interest rate is smaller than the output growth rate. Foreign debt-to-exports ratio stability requires that the international interest rate is smaller than the growth rate of exports. The external constraint may appear as a restriction to external indebtedness, imposing an upper limit to growth. Nonetheless, the presence of a domestic autonomous expenditure may relax the external constraint. The model allows for two demand-led growth regimes: balance of payments constrained and policy constrained. A fiscal policy rule is proposed to keep the foreign debt ratio below an upper limit. Simulations of five cases show the conditions for stability of debt ratios, and the outcomes of the fiscal policy rule and a structural change policy. In the simulations, fiscal policy successfully reduces the equilibrium foreign debt-to-export ratio by decreasing the share of government expenditures in autonomous demand. Successful industrial policies that increase exports’ growth keep the foreign debt ratio below the threshold with a higher growth rate than the fiscal policy rule. Altogether, the model provides stability conditions for growth in an open economy paying its international liabilities in foreign currency.


Sraffian supermultiplier; Thirlwall’s Law; demand-led growth; public debt;external debt

Jel Codes

E12; F41; F43; E62; O41