 Subprime borrowers, securitization and the transmission of business cyclesNo 07/2013, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE) 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 the existence of subprime borrowers makes the economy more responsive to different shocks 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. Keywords: Subprime Borrowers; Securitization; Financial Intermediation; Great Recession (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:072013 Access Statistics for this paper More papers in Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE) Contact information at EDIRC. |
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