Household Debt and Crises of Confidence

Thomas Hintermaier and Winfried Koeniger

No 1518, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

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: Household debt; Consumer confidence; Collateral constraints; Multiple equilibria (search for similar items in EconPapers)
JEL-codes: D91 E21 E32 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2015-08
New Economics Papers: this item is included in nep-mac and nep-ure
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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1518.pdf (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2015:18

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