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Household Debt and Crises of Confidence

Thomas Hintermaier and Winfried Koeniger

No 06/2015, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

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: E21 E32 D91 (search for similar items in EconPapers)
Date: 2015
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Related works:
Journal Article: Household debt and crises of confidence (2018) Downloads
Working Paper: Household Debt and Crises of Confidence (2015) Downloads
Working Paper: Household Debt and Crises of Confidence (2015) Downloads
Working Paper: Household Debt and Crises of Confidence (2015) Downloads
Working Paper: Household debt and crises of confidence (2015) Downloads
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