Subprime borrowers, securitization and the transmission of business cycles

Anna Grodecka-Messi

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: One of the roots of the recent global financial crisis has been seen in the design of subprime mortgage contract leading to high sensitivity of such type of loans to house price changes. The market of subprime loans, especially in the last years preceding the crisis, has been highly financed by securitization. The paper investigates how borrowers with subprime characteristics influence the transmission mechanism of business cycles in the economy and whether the securitization of subprime loans has a positive effect on the economy. The formal setup is a DSGE model with different types of borrowers and banks acting as financial intermediaries, in which households and entrepreneurs borrow against housing collateral. The economy is subject to four shocks: monetary, inflationary, preference and technology. It is shown that alone the existence of subprime borrowers does not make the economy more responsive to different shocks at the aggregate level (it has only redistributional effects) and that under certain circumstances the securitization of subprime loans (in form of residential mortgage backed securities) may lead to amplification of the business cycles.

JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Subprime borrowers, securitization and the transmission of business cycles (2019)
Journal Article: Subprime borrowers, securitization and the transmission of business cycles (2019)
Working Paper: Subprime Borrowers, Securitization and the Transmission of Business Cycles (2016)
Working Paper: Subprime borrowers, securitization and the transmission of business cycles (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100456

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