The repayment of bank credits having financed investments in the Domar model

Abstract

In the Domar model, based on the Keynesian multiplier theory, investment generates savings. Therefore, savings cannot fund investments, at least ex ante. Investments have first to be financed by bank credit, hence the question on their repayment. In this article, we suppose that investments are financed by bank credits issued on several periods, as it typically takes years for firms to reimburse their investment debt. What we then obtain is that, in order to avoid an overproduction crisis, the rate of capital accumulation has to gradually rise throughout a growth phase. This result paves the way to a theory of cycles based on the repayment of bank credits.

Refutations of Say’s Law and Dynamics of a Monetary Economy of Production

“…Therefore, long-term bank credits, which increased demand in the past, will decrease it in the future when they need to be repaid. The repayment of past bank credits will then modify the dynamics of the economy, as has been highlighted in two recent studies (Cottin-Euziol and Rochon 2013;Cottin-Euziol 2015). By adding the repayments of past bank credits to the previous expression, we obtain inequality (3):…”

“…Although long-term bank credits have increased demand in the past, they will decrease it in the future when these loans have to be repaid. The repayment of past bank credits will then modify the dynamics of the economy, as has been highlighted in some recent studies (Cottin-Euziol 2015; Cottin-Euziol and Piluso 2021; Cottin-Euziol and Rochon 2013). If the amount of repayment is denoted as A , and assuming that firms make these repayments on their profits, we obtain the situation shown in figure 5.…”