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A simple model of subprime borrowers and credit growth

Author

Listed:
  • Alejandro Justiniano
  • Giorgio E. Primiceri
  • Andrea Tambalotti

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 of 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. Owing to their low incomes, 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.

Suggested Citation

  • Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2016. "A simple model of subprime borrowers and credit growth," Staff Reports 766, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:766
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    References listed on IDEAS

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    1. Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, 2019. "Debt Constraints and Employment," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1926-1991.
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    3. Midrigan, Virgiliu & Philippon, Thomas, 2011. "Household Leverage and the Recession," CEPR Discussion Papers 8381, C.E.P.R. Discussion Papers.
    4. Fernando Ferreira & Joseph Gyourko, 2015. "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012," NBER Working Papers 21261, National Bureau of Economic Research, Inc.
    5. Stefania Albanesi, 2016. "Credit Growth and the Financial Crisis: A New Narrative," 2016 Meeting Papers 575, Society for Economic Dynamics.
    6. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2013. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 219-276, June.
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    8. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    9. David Berger & Veronica Guerrieri & Guido Lorenzoni & Joseph Vavra, 2018. "House Prices and Consumer Spending," Review of Economic Studies, Oxford University Press, vol. 85(3), pages 1502-1542.
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    11. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    12. Guerrieri, Veronica & Hartley, Daniel & Hurst, Erik, 2013. "Endogenous gentrification and housing price dynamics," Journal of Public Economics, Elsevier, vol. 100(C), pages 45-60.
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    Cited by:

    1. Xavier Freixas & David Perez-Reyna, 2017. "The Gilded Bubble Buffer," Documentos CEDE 015789, Universidad de los Andes - CEDE.
    2. Martino, Ricci & Patrizio, Tirelli, 2017. "Subprime Mortgages and Banking in a DSGE Model," Working Papers 366, University of Milano-Bicocca, Department of Economics, revised 22 Jun 2017.
    3. Robin G. Newberger & Maude Toussaint-Comeau, 2017. "Minority-Owned Banks and Their Primary Local Market Areas," Economic Perspectives, Federal Reserve Bank of Chicago, issue 4, pages 1-31.
    4. Sapci, Ayse & Vu, Nam, 2017. "Housing Wealth Reallocation Between Subprime and Prime Borrowers During Recessions," Working Papers 2017-03, Department of Economics, Colgate University, revised 19 Sep 2017.
    5. Egle Jakucionyte & Swapnil Singh, 2020. "Bowling Alone, Buying Alone: The Decline of Co-Borrowers in the US Mortgage Market," Bank of Lithuania Working Paper Series 78, Bank of Lithuania.
    6. Shirota, Toyoichiro, 2018. "What is the major source of business cycles: Spillovers from land prices, investment shocks, or anything else?," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 138-149.

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    More about this item

    Keywords

    home prices; housing boom; household debt; credit supply; collateral constraints;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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