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Minimal Settlement Assets in Economies with Interconnected Financial Obligations

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  • 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.

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  • Julio J. Rotemberg, 2011. "Minimal Settlement Assets in Economies with Interconnected Financial Obligations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 81-108, February.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:1:p:81-108
    DOI: 10.1111/j.1538-4616.2010.00366.x
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    1. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    2. Maryam Farboodi, 2014. "Intermediation and Voluntary Exposure to Counterparty Risk," 2014 Meeting Papers 365, Society for Economic Dynamics.
    3. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    4. He, Yi & Wu, Shan & Tong, Mu, 2019. "Systemic risk and liquidity rescue in complex financial networks: Pit hole and black hole of liquidity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    5. Hitoshi Hayakawa, 2020. "Liquidity in Financial Networks," Computational Economics, Springer;Society for Computational Economics, vol. 55(1), pages 253-301, January.
    6. Faff, Robert W. & Parwada, Jerry T. & Tan, Eric K.M., 2019. "Did connected hedge funds benefit from bank bailouts during the financial crisis?," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    7. Hitoshi Hayakawa, 2014. "Complexity of Payment Network," CARF F-Series CARF-F-345, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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