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A simple model of subprime borrowers and credit growth

Author

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  • Giorgio Primiceri

    (Northwestern University)

  • Andrea Tambalotti

    (Federal Reserve Bank of New York)

  • Alejandro Justiniano

    (Federal Reerve Chicago)

Abstract

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.

Suggested Citation

  • Giorgio Primiceri & Andrea Tambalotti & Alejandro Justiniano, 2016. "A simple model of subprime borrowers and credit growth," 2016 Meeting Papers 704, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:704
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    References listed on IDEAS

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    1. 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.
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    13. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2015. "Loan Originations and Defaults in the Mortgage Crisis: Further Evidence," NBER Working Papers 21320, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Sapci, Ayse & Vu, Nam T., 2022. "Housing Wealth Reallocation Between Subprime And Prime Borrowers During Recessions," Macroeconomic Dynamics, Cambridge University Press, vol. 26(7), pages 1775-1805, October.
    2. Albanesi, Stefania & DeGiorgi, Giacomo & Nosal, Jaromir, 2022. "Credit growth and the financial crisis: A new narrative," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 118-139.
    3. Xavier Freixas & David Perez-Reyna, 2017. "The Gilded Bubble Buffer," Documentos CEDE 15789, Universidad de los Andes, Facultad de Economía, CEDE.
    4. Charles Ka Yui LEUNG, 2022. "Housing and Macroeconomics," ISER Discussion Paper 1197, Institute of Social and Economic Research, Osaka University.
    5. Jakučionytė, Eglė & Singh, Swapnil, 2022. "Bowling alone, buying alone: The decline of co-borrowers in the US mortgage market," Journal of Housing Economics, Elsevier, vol. 58(PB).
    6. 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.
    7. 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.
    8. 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.
    9. Shirota, Toyoichiro, 2018. "What is the Major Source of Business Cycles : Spillovers from Land Prices, Investment Shocks, or Anything Else?," Discussion paper series. A 323, Graduate School of Economics and Business Administration, Hokkaido University.
    10. Abd Samad, Khairunnisa & Mohd Daud, Siti Nurazira & Mohd Dali, Nuradli Ridzwan Shah, 2020. "Early Warning Indicators for Systemic Banking Crises: Household Debt and Property Prices," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 54(1), pages 121-134.
    11. Flannery, Mark J. & Lin, Leming & Wang, Luxi, 2022. "Housing booms and bank growth," Journal of Financial Intermediation, Elsevier, vol. 52(C).

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    More about this item

    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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