Working Paper: CEPR ID: DP10865
Authors: Thomas Hintermaier; Winfried Koeniger
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 Codes: D91; E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household debt (G51) | economy's vulnerability to crises of confidence (E32) |
| liquidity feedback effect (E44) | borrowing opportunities (F34) |
| housing collateral (R31) | borrowing opportunities (F34) |
| household debt (G51) | changes in consumer confidence (D12) |
| changes in consumer confidence (D12) | house prices (R31) |
| changes in consumer confidence (D12) | consumption choices (D10) |
| household debt exceeds critical threshold (G51) | changes in consumer confidence (D12) |
| liquidity feedback mechanism (E44) | fluctuations in house prices (E32) |
| liquidity feedback mechanism (E44) | fluctuations in consumption (E21) |
| temporarily low interest rates (E43) | likelihood of crises (H12) |
| expected income growth (O49) | likelihood of crises (H12) |