Household Debt and Crises of Confidence

Winfried Koeniger and Thomas Hintermaier

No 10865, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that the size of collateralized household debt determines an economy's vulnerability to crises of confidence. The house price feeds back on itself by contributing to a liquidity effect, which operates through the value of housing in a collateral constraint. Over a specific range of debt levels this liquidity feedback effect is strong enough to give rise to multiplicity of house prices. In a dynamic setup, we conceptualize confidence as a realization of rationally entertainable belief-weightings of multiple future prices. This delivers debt-level-dependent bounds on the extent to which confidence may drive house prices and aggregate consumption.

Keywords: Collateral constraints; Consumer confidence; Household debt; Multiple equilibria (search for similar items in EconPapers)
JEL-codes: D91 E21 E32 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-mac and nep-ure
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Related works:
Journal Article: Household debt and crises of confidence (2018)
Working Paper: Household Debt and Crises of Confidence (2015)
Working Paper: Household Debt and Crises of Confidence (2015)
Working Paper: Household Debt and Crises of Confidence (2015)
Working Paper: Household debt and crises of confidence (2015)
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