Work

Leverage–led growth in the circuit of capital model with a banking sector

Year: 2025

Type: article

Abstract: Economic growth in the circuit of capital model with effective demand is fundamentally leverage-led. This paper extends the circuit of capital model by incorporating a banking sector and related financial variables, identifying three types of growth regime: firm leverage-led, bank leverage-led, and investment-led. The key findings are as follows. First, growth potential is strongest when driven by investment and firm leverage, but this leads to an unbounded rise in the interest rates. In contrast, bank leverage-led growth imposes upper limits on both growth and the interest rate. Second, the interest rate rises across all growth types, except in bank leverage-led growth, where the interest rate may fall under certain conditions. Third, the effects on financial fragility differ across growth types: investment-led growth has no impact on it, firm leverage-led growth raises it, and bank leverage-led growth reduces it.

Source: Economic Modelling

DOI: 10.1016/j.econmod.2025.107275

Author: Hyun Woong Park

Institution: Denison University

Language: English

Topic: Economic Theory and Policy

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,660