Household Debt and Crises of Confidence
CFS Working Paper No. 519
55 Pages Posted: 14 Oct 2015
Date Written: October 1, 2015
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