Abstract:The paper attempts to clarify some of the implications of different autonomous demands, with differing rates of growth, in a demandled growth model where policy makers are concerned about the ratios of external debt to income and public sector debt to income. We seek a fairly simple explanation of the actual growth rate in terms of the growth rate of aggregate demand and thus a demandled approach. We derive an expression for the actual growth rate of demand at any time in terms of actual growth rate in the preceding period, the rate of growth of autonomous demand and the warranted growth rate. One element in the analysis is Harrodâ€™s notion that the interplay of warranted and actual growth rates will be an indicator of undesired excess or deficient capacities, with the warranted growth rate being driven by autonomous demand growth. Having established the relation between the actual growth rate, autonomous demand and the warranted growth rate, the discussion turns to the determinants of autonomous demand â€“ in this paper, net export demand and public sector expenditure. And it is here that debt constraints become relevant, specifically, the ratio of public sector debt to output and the ratio of external debt to output. With the tax share, the evolution of the public debt ratio is then bound up with the evolution of the ratio of public sector expenditure to income. We assume that while policy makers are mindful of both the export to income ratio and the public sector expenditure to income ratio, their ability to influence either ratio in our analysis is largely restricted to their influence over the rate of growth of public sector expenditure. The paper goes on to explore the likely interactions between debt constraints, the growth rate of aggregate demand and autonomous demand by means of dynamic simulations.
