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.
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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