A simple model of subprime borrowers and credit growth

Alejandro Justiniano, Giorgio Primiceri and Andrea Tambalotti

No 766, Staff Reports from Federal Reserve Bank of New York

Abstract: The surge in credit and house prices that preceded the Great Recession was particularly pronounced in ZIP codes with a higher fraction of subprime borrowers (Mian and Sufi 2009). We present a simple model of prime and subprime borrowers distributed across geographic locations, which can reproduce this stylized fact as a result of an expansion in the supply of credit. Owing to their low incomes, subprime households are constrained in their ability to meet interest payments and hence sustain debt. As a result, when the supply of credit increases and interest rates fall, they take on disproportionately more debt than their prime counterparts, who are not subject to that constraint.

Keywords: home prices; housing boom; household debt; credit supply; collateral constraints (search for similar items in EconPapers)
JEL-codes: E21 E44 G21 (search for similar items in EconPapers)
Date: 2016-02-01
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: A Simple Model of Subprime Borrowers and Credit Growth (2016)
Working Paper: A Simple Model of Subprime Borrowers and Credit Growth (2016)
Working Paper: A Simple Model of Subprime Borrowers and Credit Growth (2016)
Working Paper: A simple model of subprime borrowers and credit growth (2016)
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