A Simple Model of Subprime Borrowers and Credit Growth
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.
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Document Object Identifier (DOI): 10.3386/w21942
Published: Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2016. "A Simple Model of Subprime Borrowers and Credit Growth," American Economic Review, vol 106(5), pages 543-547. citation courtesy of
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