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Implications of the Modigliani-Miller Theorem for the Study of Exchange Rate Regimes

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Author Info
Alexandre B. Cunha (IBMEC Business School - Rio de Janeiro)

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Abstract

We extend the Modigliani-Miller Theorem to the composition of the public debt and show that in a deterministic model the structure of a government's assets and liabilities is undetermined. Hence, a floating exchange rate regime can implement any attainable competitive equilibrium. Concerning stochastic economies, if the government issues nominal bonds of several maturities, then the same result may hold. Thus, a conceivable link between the choice of an exchange rate regime and economic outcomes may be due to factors often not considered in standard macroeconomic models.

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Paper provided by Economics Research Group, IBMEC Business School - Rio de Janeiro in its series IBMEC RJ Economics Discussion Papers with number 2006-03.

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Date of creation: 24 Oct 2006
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Handle: RePEc:ibr:dpaper:2006-03

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Postal: Av. Pres. Wilson 118, 11 andar, Rio de Janeiro, RJ, Brazil, 20030-020
Web page: http://professores.ibmecrj.br/erg/
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Related research
Keywords: Modigliani-Miller Theorem; exchange rate regime; indeterminacy;

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Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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