Multiplier effect, Credit, and Economic Cycle: a neo-Kaleckian model
Considering the cumulative evidence indicating a stronger multiplier effect of social benefits, such as pensions, during the 2015–2016 crisis in Brazil, and noting that the consigned credit granted to retired workers exhibited significantly smaller fluctuations compared to that extended to active workers, some studies argue that social benefits served as a stabilizing force for income during the crisis. Building upon this finding, 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. 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 government multiplier). Furthermore, we discuss some conditions under which the multiplier effect of social benefits is higher than that for autonomous expenditure, aligning with findings from the empirical literature. 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.