Growth led by government expenditure and exports: Public and external debt stability in a supermultiplier model

The Sraffian supermultiplier model revealed the role of autonomous demand in economic growth. Nevertheless, the sustainability of growth requires the stability of the financial stocks behind autonomous demand. Growth led by government expenditure and exports is thus stable if both public and external debts are stable. In this paper, we assess the stability of this growth process in a supermultiplier model. The external constraint may appear as a restriction to external indebtedness, imposing an upper limit to growth. Nonetheless, the domestic autonomous expenditure can keep the economy distant from the external constraint. A fiscal policy rule is proposed to contain foreign indebtedness. Simulations support the analytical results, and compare the outcomes of the fiscal policy rule and a structural change policy. Altogether, the model provides stability conditions for growth in an open economy paying its international liabilities in foreign currency.