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Credit Chains and Mortgage Crises

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  • Paula Lourdes Hernandez-Verme

Abstract

Here I examine a production economy with a financial sector that contains multiple layers of credit. The latter constitute credit chains that include 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 allocating role, and agents have a serious 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. A liquidity crunch is associated with higher rates of default that can trigger a financial crisis as well as constrain the purchase of production factors, leading to reductions in welfare, together with potentially serious effects on real economic activity with the potential of causing deep and widespread recessions.

Suggested Citation

  • Paula Lourdes Hernandez-Verme, 2015. "Credit Chains and Mortgage Crises," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 265-281, May.
    • Handle: RePEc:bla:rdevec:v:19:y:2015:i:2:p:265-281
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    File URL: http://hdl.handle.net/10.1111/rode.12141
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    References listed on IDEAS

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