Document Type
Article
Publication Date
1-1-2018
Journal / Book Title
International Journal of Theoretical and Applied Finance
Abstract
We use the case of the 2007 United States subprime mortgage crisis to investigate the impact of borrowing capacity limitations on financial instability and contagion. We divide an economy into agents that interact via flow of funds and express the financial instability level of each agent as a function of time derivatives of its wealth, cash inflows, and borrowing capacity. We show that among these factors, the borrowing capacity, which is determined by other economic constraints, has the largest impact on financial instability. It is suggested that borrowing capacity limitations could even cause contagion through feedback loop formed by flow of funds. We use historical time series of the integrated macroeconomic accounts of the United Stated from 1960 to 2017 to verify our conjecture by quantifying the financial instability levels of the agents under different levels of borrowing capacity and how they affect one another during the period of the subprime mortgage crisis. Finally, the constraints of data collecting practice outside the United States in assessing borrowing capacity is addressed, accompanied by partial, yet compatible, results of selected Eurozone countries.
DOI
10.1142/S0219024918500607
MSU Digital Commons Citation
Choi, Youngna, "Borrowing Capacity, Financial Instability, and Contagion: Case Study of the U.S. Subprime Mortgage Crisis" (2018). Department of Applied Mathematics and Statistics Faculty Scholarship and Creative Works. 24.
https://digitalcommons.montclair.edu/appliedmath-stats-facpubs/24
Published Citation
Choi, Y. (2018). Borrowing Capacity, Financial Instability, and Contagion: Case Study of the US Subprime Mortgage Crisis. Financial Instability, and Contagion: Case Study of the US Subprime Mortgage Crisis (January 6, 2018).
