Multiplier effect, credit and economic cycle: a neo-Kaleckian model

Abstract

Purpose: Building on evidence of a stronger multiplier effect of social benefits during Brazil’s 2015–2016 crisis, and the relative stability of consigned credit to retirees compared to active workers, we propose a demand-driven theoretical model to formalize the observed higher transfer multiplier in recessions. Design/methodology/approach: We develop a neo-Kaleckian theoretical framework to delve into the circumstances under which the multiplier effect is augmented during economic downturns. Our model incorporates two classes and household borrowing. Findings: We find that the countercyclical nature of both credit supply and demand contributes to a more pronounced countercyclical multiplier effect (for both transfer and autonomous expenditure multiplier). Greater access to consigned credit strengthened credit’s countercyclical role, enhancing social transfers’ stabilization during crises. However, high household debt limits this effect. Originality/value: In essence, our model formalizes the notion that social benefits, when combined with credit mechanisms, constitute a significant element in income stabilization during economic contractions. Nevertheless, elevated household debt constrains this impact.