Household Debt and Crises of Confidence

54 Pages Posted: 19 Oct 2015

See all articles by Thomas Hintermaier

Thomas Hintermaier

Institute for Advanced Studies, Vienna

Winfried Koeniger

University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics; Swiss Finance Institute

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

Hintermaier, Thomas and Koeniger, Winfried, Household Debt and Crises of Confidence. IZA Discussion Paper No. 9409, Available at SSRN: https://ssrn.com/abstract=2675446 or http://dx.doi.org/10.2139/ssrn.2675446

Thomas Hintermaier (Contact Author)

Institute for Advanced Studies, Vienna ( email )

Josefstädter Straße 39
1080 Vienna
Austria

Winfried Koeniger

University of St. Gallen ( email )

Swiss Institute for Empirical Economic Research
Varnbüelstr. 14
St.Gallen, CH-9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Center for Financial Studies (CFS) ( email )

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IZA Institute of Labor Economics ( email )

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Germany

Swiss Finance Institute ( email )

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

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