Household Debt and Crises of Confidence

54 Pages Posted: 13 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; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: October 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: collateral constraints, consumer confidence, household debt, multiple equilibria

JEL Classification: D91, E21, E32

Suggested Citation

Hintermaier, Thomas and Koeniger, Winfried, Household Debt and Crises of Confidence (October 2015). CEPR Discussion Paper No. DP10865, Available at SSRN: https://ssrn.com/abstract=2673617

Thomas Hintermaier (Contact Author)

University of Bonn ( email )

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Bonn, D-53012
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Winfried Koeniger

University of St. Gallen ( email )

Swiss Institute for Empirical Economic Research
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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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Swiss Finance Institute ( email )

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

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