The Capital Structure of Nations
Patrick Bolton and
Haizhou Huang ()
No 23612, NBER Working Papers from National Bureau of Economic Research, Inc
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.
JEL-codes: E5 E62 F3 F4 G3 (search for similar items in EconPapers)
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Published as Patrick Bolton & Haizhou Huang, 2018. "The Capital Structure of Nations*," Review of Finance, vol 22(1), pages 45-82.
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