DEFAULT AND FRAGILITY IN THE PAYMENT SYSTEM

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

Abstract

I present a model of the payment system where agents may choose whether or not to default on debt. Our model also features debt-financed purchases of goods, unsecured debt cleared through third parties, and debt settlement requiring final payment using fiat money. I compare the merits of three alternative settlement rules: a strict net settlement rule, a net settlement rule with debt forgiveness and a gross settlement rule. I find that net settlement is superior to gross settlement and that only a net settlement rule with debt forgiveness gives the correct incentives for a unique, stable and optimal stationary equilibrium.

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Published
2013-07-09
How to Cite
Verme, P. L. H. (2013). DEFAULT AND FRAGILITY IN THE PAYMENT SYSTEM. European Scientific Journal, ESJ, 9(19). https://doi.org/10.19044/esj.2013.v9n19p%p

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