A Simple Model of Subprime Borrowers and Credit Growth

17 Pages Posted: 4 Feb 2016 Last revised: 30 Aug 2017

See all articles by Alejandro Justiniano

Alejandro Justiniano

Federal Reserve Bank of Chicago

Giorgio E. Primiceri

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Andrea Tambalotti

Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: 2016-02-01

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.

Keywords: home prices, housing boom, household debt, credit supply, collateral constraints

JEL Classification: E21, E44, G21

Suggested Citation

Justiniano, Alejandro and Primiceri, Giorgio E. and Tambalotti, Andrea, A Simple Model of Subprime Borrowers and Credit Growth (2016-02-01). FRB of NY Staff Report No. 766, Available at SSRN: https://ssrn.com/abstract=2727645

Alejandro Justiniano (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Giorgio E. Primiceri

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://faculty.econ.northwestern.edu/faculty/primiceri

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andrea Tambalotti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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