Download This PaperHousehold Debt and Crises of Confidence
CFS Working Paper No. 519
55 Pages Posted: 14 Oct 2015
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Household Debt and Crises of Confidence
Household Debt and Crises of Confidence
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: Suggested Citation
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