DP10865 Household Debt and Crises of Confidence
Author(s): | Thomas Hintermaier, Winfried Koeniger |
Publication Date: | October 2015 |
Keyword(s): | collateral constraints, consumer confidence, household debt, multiple equilibria |
JEL(s): | D91, E21, E32 |
Programme Areas: | Financial Economics, Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=10865 |
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.