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Household debt and crises of confidence

Author

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  • Thomas Hintermaier
  • Winfried Koeniger

Abstract

This paper develops a notion of consumer confidence within a dynamic competitive equilibrium framework. In any situation where multiple equilibrium prices on next‐period spot markets are equally supported by the state of the economy, confidence is encoded in the subjective probabilities consumers attach to these multiple future outcomes. Our approach characterizes the set of all equilibrium‐consistent subjective probabilities, and thereby endogenizes the extent of uncertainty faced by consumers. We use the structure of an economy with collateralized household debt and housing markets to develop and illustrate this concept. Our approach determines the specific range of debt levels at which this economy is vulnerable to crises of confidence, as well as the debt‐level‐specific extent of confidence‐driven house price fluctuations.

Suggested Citation

  • Thomas Hintermaier & Winfried Koeniger, 2018. "Household debt and crises of confidence," Quantitative Economics, Econometric Society, vol. 9(3), pages 1489-1542, November.
    • Handle: RePEc:wly:quante:v:9:y:2018:i:3:p:1489-1542
    DOI: 10.3982/QE769
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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.
    2. Yang, Hu & Chen, Yu & Chen, Kedong & Wang, Haijun, 2024. "Temporal-spatial dependencies enhanced deep learning model for time series forecast," International Review of Financial Analysis, Elsevier, vol. 94(C).

    More about this item

    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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