Household Debt and Crises of Confidence

CFS Working Paper No. 519

55 Pages Posted: 14 Oct 2015

See all articles by Thomas Hintermaier

Thomas Hintermaier

University of Bonn

Winfried Koeniger

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 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

Hintermaier, Thomas and Koeniger, Winfried, Household Debt and Crises of Confidence (October 1, 2015). CFS Working Paper No. 519. Available at SSRN: https://ssrn.com/abstract=2672944 or http://dx.doi.org/10.2139/ssrn.2672944

Thomas Hintermaier

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Winfried Koeniger (Contact Author)

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 )

Poschinger Str. 5
Munich, DE-81679
Germany

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Schaumburg-Lippe Str. 7/9
D-53072 Bonn
Germany

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