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The Capital Structure of Nations

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  • Patrick Bolton
  • Haizhou Huang

Abstract

When a nation can finance its investments via foreign-currency denominated debt or domestic-currency claims, what is the optimal capital structure of the nation? Building on the functions of fiat money as both medium of exchange, and store of value like corporate equity, our model connects monetary economics, fiscal theory and international finance under a unified corporate finance perspective. With frictionless capital markets both a Modigliani-Miller theorem for nations and the classical quantity theory of money hold. With capital market frictions, a nation's optimal capital structure trades off inflation dilution costs and expected default costs on foreign-currency debt. Our framing focuses on the process by which new money claims enter the economy and the potential wealth redistribution costs of inflation.

Suggested Citation

  • Patrick Bolton & Haizhou Huang, 2017. "The Capital Structure of Nations," NBER Working Papers 23612, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23612 Note: CF IFM ME
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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