American Economic Review Vol. 106 No. 5 2016

A Simple Model of Subprime Borrowers and Credit Growth

Alejandro Justiniano¹; Giorgio E. Primiceri²; Andrea Tambalotti³

¹ Economic Research, Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, IL 60604 (e-mail: ) · ² Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, Centre for Economic Policy Research, and National Bureau of Economic Research (e-mail: ) · ³ Research and Statistics Group, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10012 (e-mail: )

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 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.

DOI

10.1257/aer.p20161087

Volume

106

Issue

5

Pages

543-547

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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