The Capital Structure of Nations

62 Pages Posted: 2 Jun 2016 Last revised: 14 Jun 2017

See all articles by Patrick Bolton

Patrick Bolton

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Haizhou Huang

China International Capital Corporation Limited

Multiple version iconThere are 3 versions of this paper

Date Written: June 6, 2017

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.

Keywords: Sovereign Financial Structure, Money, Domestic-currency Liabilities, Foreign-currency Debt

JEL Classification: E41, E44, E62, F34, G32

Suggested Citation

Bolton, Patrick and Huang, Haizhou, The Capital Structure of Nations (June 6, 2017). Columbia Business School Research Paper No. 16-44, Available at SSRN: https://ssrn.com/abstract=2787982 or http://dx.doi.org/10.2139/ssrn.2787982

Patrick Bolton (Contact Author)

Columbia Business School - Department of Economics ( email )

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HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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HOME PAGE: http://www.ecgi.org

Haizhou Huang

China International Capital Corporation Limited ( email )

28th Floor, China World Tower 2
No. 1 Jian Guo Men Wai Avenue
Beijing 100004
United States

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