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

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  • Alexandre B. Cunha

    (IBMEC Business School - Rio de Janeiro)

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.

Suggested Citation

  • Alexandre B. Cunha, 2006. "Implications of the Modigliani-Miller Theorem for the Study of Exchange Rate Regimes," IBMEC RJ Economics Discussion Papers 2006-03, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    • Handle: RePEc:ibr:dpaper:2006-03
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    File URL: http://professores.ibmecrj.br/erg/dp/papers/dp200603.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Modigliani-Miller Theorem; exchange rate regime; indeterminacy;
    All these keywords.

    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; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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