The macroeconomics of Modigliani–Miller

Hans Gersbach, Hans Haller and Jürg Müller

Journal of Economic Theory, 2015, vol. 157, issue C, 1081-1113

Abstract: We examine the validity of a macroeconomic version of the Modigliani–Miller theorem. By this, we mean that different capital structures can occur in equilibrium and that all of them are associated with the same allocation of commodities and the same welfare. We develop a general equilibrium model with two production sectors, risk-averse households, and financial intermediation by banks. Banks are funded by (safe) deposits and (outside) equity and monitor borrowers in lending. Two sets of equilibria emerge. These sets differ with regard to the debt-equity ratios of banks, investment in risky technologies, bank defaults, and whether first-best allocations are attained. Hence, the macroeconomic version of the Modigliani–Miller theorem fails to hold. Imposing minimum equity capital requirements, however, eliminates all inefficient equilibria and guarantees the validity of the macroeconomic version of the Modigliani–Miller theorem.

Keywords: Financial intermediation; Banking; Capital structure; Modigliani–Miller; General equilibrium; Capital requirements (search for similar items in EconPapers)
JEL-codes: D53 E44 G2 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: The Macroeconomics of Modigliani-Miller (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:157:y:2015:i:c:p:1081-1113

DOI: 10.1016/j.jet.2015.02.003

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