infonet-economy

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.