Changes in Debt

Mainstream macroeconomists have a tendency to see debt as a flow variable, whereas heterodox economists emphasizes that debt should be understood as a stock-flow component in the economy. In this way changes in debt has to do with adjustments in assets and liabilities as well as in the servicing of interests. To bridge the interests a stock-flow model of debt changes is proposed. A sectoral approach is taken to debt changes underlining that debt is first of all a sectoral problem before becoming a total economy issue. The model is derived from the policy relevant indicator for debt, the nominal debt to nominal GDP. The resulting model show that debt changes are directly linked to changes in the real rate of interest and the real economic growth rate, and to the indirect effects of these changes on the net income and net asset positions of the economy's sectors. The results are used to explain the recent surge in world debt levels and possible linkages to monetary policy