WP 04: Household debt, knowledge capital accumulation and macrodynamic performance

Moti­va­ted to some extent by the empi­ri­cal sig­ni­fi­can­ce of stu­dent loans in the U.S., this paper incor­po­ra­tes kno­wled­ge capi­tal for­ma­ti­on by wor­king hou­seholds finan­ced through debt to a demand-led dyna­mic model of phy­si­cal and kno­wled­ge capi­tal uti­li­za­ti­on and out­put growth. Ave­ra­ge labor pro­duc­ti­vity vari­es posi­ti­vely with the ave­ra­ge kno­wled­ge capi­tal across the labor for­ce. A rise in labor pro­duc­ti­vity resul­ting from kno­wled­ge capi­tal accu­mu­la­ti­on is fully pas­sed on to the real wage, so that the wage sha­re remains cons­tant. In the uni­que long- run equi­li­brium, whi­ch is sta­ble, an exo­ge­nous rise in the wage sha­re rai­ses the rates of phy­si­cal capi­tal uti­li­za­ti­on and out­put growth but has an ambi­guous effect on the rate of employ­ment (whi­ch also mea­su­res the rate of kno­wled­ge capi­tal uti­li­za­ti­on). The long-run equi­li­brium also fea­tu­res the fol­lowing inter­re­la­ted results: the out­put growth rate is gre­a­ter than the exo­ge­nous inte­rest rate; the debt ratio (wor­king hou­seholds’ debt as a ratio of either the phy­si­cal or the kno­wled­ge capi­tal, or the out­put) is inde­pen­dent from the inte­rest rate; and the allo­ca­ti­on of a higher (lower) pro­por­ti­on of wage inco­me to debt repay­ment (con­sump­ti­on) rai­ses ins­te­ad of lowers the debt ratio, whi­ch we dub the para­dox of debt repayment.

Keywords: Hou­sehold debt; kno­wled­ge capi­tal; capa­city uti­li­za­ti­on; employ­ment rate; out­put growth.

J.E.L. Clas­si­fi­ca­ti­on Codes: E12, E22, E24.

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