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HOUSING WEALTH REALLOCATION BETWEEN SUBPRIME AND PRIME BORROWERS DURING RECESSIONS

Published online by Cambridge University Press:  01 March 2021

Ayse Sapci  and
Nam T. Vu
Ayse Sapci*
Affiliation:
Utah State University
Nam T. Vu
Affiliation:
Miami University
*
Address correspondence to: Ayse Sapci, Department of Economics and Finance, Utah State University, 3565 Old Main Hill, Logan, UT 84322-3565, USA. email: ayse.sapci@usu.edu. Phone: 435 797 2332.
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Abstract

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The Survey of Consumer Finances (SCF) indicates that, unlike subprime borrowers, prime borrowers are more likely to own investment homes during recessions than during recoveries. Drawing on this empirical fact, we present and estimate a dynamic stochastic general equilibrium (DSGE) model that distinguishes between borrowers through their credit access. We find that the relative ease of credit access among borrowers explains the divergence in investment homeownership seen in the data. This divergence is amplified when subprime borrowers are subject to lax credit conditions prior to a financial shock or when the nominal interest rate is constrained at the zero lower bound (ZLB). An expansionary monetary policy helps bridge this gap across borrowers.

Keywords

Housing InvestmentCredit AccessSubprime BorrowersPrime Borrowers
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 7 , October 2022 , pp. 1775 - 1805
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2021

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