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Household Debt and Crises of Confidence

Listed author(s):
  • Hintermaier, Thomas

    ()

  • Koeniger, Winfried

    ()

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.

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File URL: http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1518.pdf
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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1518.

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Length: 55 pages
Date of creation: Aug 2015
Handle: RePEc:usg:econwp:2015:18
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