Journal Article | Journal of Money, Credit & Banking | February 2011

Minimal Settlement Assets in Economies with Interconnected Financial Obligations

by Julio J. Rotemberg

Abstract

A model is developed where firms belonging to a group are obliged to make payments to one another by using a liquid asset. The paper studies the exogenous endowments of this asset that are necessary to assure that all obligations are met. Conditions are presented under which the degree to which firms are interconnected (so that each creditor has more debtors and each debtor has more creditors) increases the number of firms that must be endowed with the liquid asset. Interconnectedness then makes payment defaults more likely. By acquiring too many payment obligations, firms may also become too interconnected.

Keywords: Borrowing and Debt; Financial Liquidity; Financing and Loans; Networks;

Citation:

Rotemberg, Julio J. "Minimal Settlement Assets in Economies with Interconnected Financial Obligations." Journal of Money, Credit & Banking 43, no. 1 (February 2011): 81–108.