Working Paper: CEPR ID: DP11083
Authors: 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 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.
Keywords: Collateral Constraint; Credit Supply; House Price; Household Debt; Housing Boom
JEL Codes: E21; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in credit supply (E51) | Disproportionate increase in mortgage debt among subprime borrowers (G21) |
| Increase in credit supply (E51) | Increased borrowing capacity for subprime borrowers (G51) |
| Increased borrowing capacity for subprime borrowers (G51) | Increased mortgage debt accumulation (G51) |
| Increase in credit supply (E51) | Increased house prices (R31) |
| Increase in share of subprime borrowers (G21) | Increase in mortgage debt growth (G21) |
| Increase in share of subprime borrowers (G21) | Increase in house prices (R31) |