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 without features (i) and (ii) - that works as 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