Discussion Paper Details

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Title: A Simple Model of Subprime Borrowers and Credit Growth

Author(s): Alejandro Justiniano, Giorgio E Primiceri and Andrea Tambalotti

Publication Date: January 2016

Keyword(s): collateral constraint, credit supply, house price, household debt and housing boom

Programme Area(s): Financial Economics and International Macroeconomics and Finance

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.

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Bibliographic Reference

Justiniano, A, Primiceri, G and Tambalotti, A. 2016. 'A Simple Model of Subprime Borrowers and Credit Growth'. London, Centre for Economic Policy Research.