CREDIT CHAINS AND MORTGAGE CRISES

  • Paula Lourdes Hernandez Verme Departamento de Economía y Finanzas, Universidad de Guanajuato, Mexico

Abstract

I examine a production economy with a financial sector that contains multiple layers of credit. Such layers are designed to constitute credit chains which are inclusive of a simple mortgage market. The focus is on the nature and contagion properties of credit chains in an economy where the financial sector plays a real allocative role and agents have a nontrivial choice of whether to default on mortgages or not. Multiple equilibria with different rates of default are observed, due to the presence of strategic complementarities. Default can trigger a financial crisis as well as constrain the purchases of factors of production, thus leading to potentially serious effects on real activity.

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Published
2013-07-09
How to Cite
Verme, P. L. H. (2013). CREDIT CHAINS AND MORTGAGE CRISES. European Scientific Journal, ESJ, 9(19). https://doi.org/10.19044/esj.2013.v9n19p%p