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Barley, Gold, or FiatToward a Pure Theory of Money$
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Thomas Quint and Martin Shubik

Print publication date: 2014

Print ISBN-13: 9780300188158

Published to Yale Scholarship Online: May 2014

DOI: 10.12987/yale/9780300188158.001.0001

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Default and Bankruptcy

Default and Bankruptcy

Chapter:
(p.115) Chapter 8 Default and Bankruptcy
Source:
Barley, Gold, or Fiat
Author(s):

Thomas Quint

Martin Shubik

Publisher:
Yale University Press
DOI:10.12987/yale/9780300188158.003.0008

The fiat-money-with-strategic-dummy-bank models of chapter 7 are altered to allow the traders to strategically default. Mathematically this means removing the budget constraint from the traders’ optimizations but including a “default penalty” in their objective functions. Our results are identical with the models from chapter 7, except there is now a subcase of the “original endowment of money very small” case in which it is optimal for the traders to default on their loans.

Keywords:   bankruptcy, default, default penalty, interest rate vs money supply, secured loan

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