Default and Fragility in the Payments System *
BibTeX
@MISC{Freeman_defaultand,
author = {Scott Freeman and Paula Hernandez-verme and Dror Goldberg and Pere Gomis-porqueras and Joseph Haslag},
title = {Default and Fragility in the Payments System *},
year = {}
}
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Abstract
We present a model of the payments system where agents may choose whether or not to default on debt payable. Our model also features debt-financed purchases of goods, debt cleared through third parties, and debt settlement requiring final payment using fiat money. We then evaluate the relative merits of three alternative settlement rules in this environment: a strict net settlement rule, a net settlement rule with debt forgiveness and a gross settlement rule. We find that net settlement is superior to gross settlement and that only a net settlement rule with debt forgiveness--reducing obligations of those who repay debt when others are defaulting-- produces a unique, stable and optimal stationary equilibrium. JEL classification: Keywords:
Keyphrases
payment system debt forgiveness net settlement rule debt payable strict net settlement rule gross settlement alternative settlement rule jel classification fiat money relative merit final payment optimal stationary equilibrium debt settlement third party debt-financed purchase net settlement gross settlement rule
