Discussion Paper Details

Please find the details for DP10865 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Household Debt and Crises of Confidence

Author(s): Thomas Hintermaier and Winfried Koeniger

Publication Date: October 2015

Keyword(s): collateral constraints, consumer confidence, household debt and multiple equilibria

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

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.

For full details and related downloads, please visit:

Bibliographic Reference

Hintermaier, T and Koeniger, W. 2015. 'Household Debt and Crises of Confidence'. London, Centre for Economic Policy Research.