Long-run effective demand and residential investment: a Sraffian supermultiplier based analysis*

This paper builds a fully specified parsimonious Sraffian supermultiplier stock-flow consistent model (SSM-SFC) with two non-capacity-creating autonomous expenditures: residential investment and capitalist consumption. Our model represents a closed economy without a government sector with workers and capitalist households and only the latter are not credit-constrained. The introduction of residential investment implies that our SSM-SFC model has two real assets: firms’ productive capital and households’ real estate. In our model, the residential investment growth rate responds to changes in house price inflation, and capitalist consumption is financed out of financial wealth. The numerical simulation experiments show that our model adheres to the main results of the standard Sraffian supermultiplier growth model. As a particular result, an increase in the residential investment growth rate implies a decrease in real estate share in total real assets. Our numerical simulations can reproduce some stylised facts such as residential investment leading the business cycle and capital accumulation and a clockwise pattern between non-capacity creating autonomous expenditures and capacity utilisation rate.