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Household Debt and Crises of Confidence

Author

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  • Hintermaier, Thomas

    (University of Bonn)

  • Koeniger, Winfried

    (University of St. Gallen)

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.

Suggested Citation

  • Hintermaier, Thomas & Koeniger, Winfried, 2015. "Household Debt and Crises of Confidence," IZA Discussion Papers 9409, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9409
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    Cited by:

    1. Hashmat Khan & Jean-François Rouillard & Santosh Upadhayaya, 2019. "Consumer Confidence and Household Investment," Carleton Economic Papers 19-06, Carleton University, Department of Economics, revised 04 Jan 2024.

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    More about this item

    Keywords

    multiple equilibria; collateral constraints; consumer confidence; household debt;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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