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

Alexandre Cunha

No 2006-03, IBMEC RJ Economics Discussion Papers from Economics Research Group, IBMEC Business School - Rio de Janeiro

Abstract: 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.

Keywords: Modigliani-Miller Theorem; exchange rate regime; indeterminacy (search for similar items in EconPapers)
JEL-codes: E42 E58 F31 F41 G32 (search for similar items in EconPapers)
Date: 2006-10-24
New Economics Papers: this item is included in nep-cba, nep-fin, nep-ifn and nep-mac
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Citations: View citations in EconPapers (1)

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