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

  • Alexandre B. Cunha

    (IBMEC Business School - Rio de Janeiro)

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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File URL: http://professores.ibmecrj.br/erg/dp/papers/dp200603.pdf
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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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  1. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
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  10. Pablo Andres Neumeyer & Fernando Alvarez & Pat Kehoe, 2003. "The Time Consistency of Optimal Monetary and Fiscal Policies," Department of Economics Working Papers 005, Universidad Torcuato Di Tella.
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  12. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  13. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
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  29. repec:rus:hseeco:181565 is not listed on IDEAS
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