Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/92978
Authors: 
Grodecka, Anna
Year of Publication: 
2013
Series/Report no.: 
Bonn Econ Discussion Papers 07/2013
Abstract: 
One of the roots of the recent global financial crisis has been seen in the design of subprime mortgage contract leading to high sensitivity of such type of loans to house price changes. The market of subprime loans, especially in the last years preceding the crisis, has been highly financed by securitization. The paper investigates how borrowers with subprime characteristics influence the transmission mechanism of business cycles in the economy and whether the securitization of subprime loans has a positive effect on the economy. The formal setup is a DSGE model with different types of borrowers and banks acting as financial intermediaries, in which households and entrepreneurs borrow against housing collateral. The economy is subject to four shocks: monetary, inflationary, preference and technology. It is shown that the existence of subprime borrowers makes the economy more responsive to different shocks and that under certain circumstances the securitization of subprime loans (in form of residential mortgage backed securities) may lead to amplification of the business cycles.
Subjects: 
Subprime Borrowers
Securitization
Financial Intermediation
Great Recession
JEL: 
E32
E44
G01
G13
G21
R21
Document Type: 
Working Paper

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