Distribution, capital intensity and public debt-to-GDP ratio: an input output—stock flow consistent model

The paper analyzes the relationship between the interest rate and the public debt-to-GDP ratio through the lens of the Classical-Keynesian approach. We focus on the value dimension as a transmission channel of monetary policy, modeling how a change in the interest rate set by the central bank affect...

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Bibliographic Details
Published in:Economia politica (Bologna, Italy) Italy), 2024-07, Vol.41 (2), p.395-416
Main Authors: Di Domenico, Lorenzo, Barbieri Góes, Maria Cristina, Gallo, Ettore
Format: Article
Language:English
Subjects:
Economic Policy
Economics
Economics and Finance
International Political Economy
Original Paper
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Summary:The paper analyzes the relationship between the interest rate and the public debt-to-GDP ratio through the lens of the Classical-Keynesian approach. We focus on the value dimension as a transmission channel of monetary policy, modeling how a change in the interest rate set by the central bank affects the economy’s capital intensity and, in turn, debt ratios. We do so by developing a Stock-Flow Consistent Supermultiplier model (SFC-SM) based on a simplified Input–Output structure of production, showing that the effect of an increase in the interest rate on public debt-to-GDP ratio will depend on the impact exerted by the shock on the capital intensity through changes in relative prices. Lastly, we calibrate the model, showing the possible emergence of reverse capital deepening; past a threshold, any base rate hike produces an increase in the public debt-to-GDP ratio by decreasing the capital intensity of the economy.
ISSN:1120-2890
1973-820X
DOI:10.1007/s40888-023-00318-7