Household Debt and Crises of Confidence
54 Pages Posted: 19 Oct 2015
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
JEL Classification: E21, E32, D91
Suggested Citation: Suggested Citation