A Simple Model of Subprime Borrowers and Credit Growth
Alejandro Justiniano, Giorgio E. Primiceri, Andrea Tambalotti
American Economic Review · 2016 · Volume 106 · Issue 5
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 with 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. Due to their low income, 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
Household Saving, Personal Finance, Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Financial Crises, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Housing Supply and Markets
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