On the Dynamic Capital Structure of Nations: Theory and Empirics

28 Pages Posted: 23 Aug 2019

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

YINAN NI

Auburn University

Yanfei Sun

Ryerson University

Date Written: August 20, 2019

Abstract

We analyze the optimal capital structure of a nation from a corporate finance perspective. In particular, we draw an analogy between a nation's fiat money and corporate equity following Bolton and Huang (2018). Based on dynamic capital structure theory, we develop a stochastic model to determine the optimal combination of fiat money and foreign-currency debt used by a nation to fund its investments. The optimal capital structure of a nation depends on the trade-off between the inflation risk of fiat money and the default risk of foreign-currency debt. Introducing outstanding debt to our model sheds light on how a nation dynamically adjusts its capital structure over time. Based on an analysis of 22 emerging economies, the empirical results support our theoretical model of the capital structure of a nation.

Keywords: Dynamic Capital Structure, Fiat Money, Foreign-Currency Debt, Stochastic Model, Inflation Risk, Default Risk

JEL Classification: E22, E31, E41, F34, G32

Suggested Citation

Barth, James R. and NI, YINAN and Sun, Yanfei, On the Dynamic Capital Structure of Nations: Theory and Empirics (August 20, 2019). Available at SSRN: https://ssrn.com/abstract=3440286 or http://dx.doi.org/10.2139/ssrn.3440286

James R. Barth

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
334-844-2469 (Phone)
334-844-4960 (Fax)

Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
United States

YINAN NI (Contact Author)

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Yanfei Sun

Ryerson University

350 Victoria Street
Toronto, Ontario M5B 2K3
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
9
Abstract Views
58
PlumX Metrics