Discussion paper

DP11083 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.

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Citation

Tambalotti, A, G Primiceri and A Justiniano (eds) (2016), “DP11083 A Simple Model of Subprime Borrowers and Credit Growth”, CEPR Press Discussion Paper No. 11083. https://cepr.org/publications/dp11083