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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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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
Date of revision:
Handle: RePEc:ibr:dpaper:2006-03
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