Mechanism Design and the Role of Enforcement in Freeman's Model of Payments
Freeman (1996a) is the first to formulate a model in which (i) debts are repaid with money and (ii) there can arise liquidity problems which give rise to a role for a central bank discount window. I ask whether this payment system is truly essential in his model. It is not because there is another mechanism - one which features (i) and (ii) - that works well. This is because of a strong assumption regarding the enforcement of debt contracts. I then present a slightly different model of enforcement based on collateralized lending where (i) is necessary, but (ii) is not. (Copyright: Elsevier)
Volume (Year): 7 (2004)
Issue (Month): 1 (january)
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- Freeman, Scott, 1996.
"Clearinghouse banks and banknote over-issue,"
Journal of Monetary Economics,
Elsevier, vol. 38(1), pages 101-115, August.
- Huggett, Mark & Krasa, Stefan, 1996.
"Money and Storage in a Differential Information Economy,"
Springer, vol. 8(2), pages 191-210, August.
- Mark Huggett & Stefan Krasa, 1996. "Money and storage in a differential information economy (*)," Economic Theory, Springer, vol. 8(2), pages 191-209.
- Edward J. Green, 1999.
"Money and debt in the structure of payments,"
Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
- Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-44.
- Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
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