On the dynamic capital structure of nations: Theory and empirics

Yinan Ni, James Barth and Yanfei Sun

Research in International Business and Finance, 2022, vol. 62, issue C

Abstract: We develop a dynamic model of the optimal capital structure of a nation from a corporate finance perspective. A stochastic model is developed to determine the optimal combination of fiat money, domestic-currency debt, and foreign-currency debt for a nation to fund economic growth and development. We then test the implications of the model based on an analysis of data for 22 emerging economies. Consistent with the theoretical model, our findings indicate that the combination of money and debt depends on the trade-off between the inflation risk of fiat money and domestic-currency debt, and the default risk of foreign-currency debt.

Keywords: Dynamic capital structure; Stochastic model; Inflation risk; Default risk (search for similar items in EconPapers)
JEL-codes: E22 E31 E41 F34 G32 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001131

DOI: 10.1016/j.ribaf.2022.101725

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