Discussion paper

DP12157 The Capital Structure of Nations

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.


Bolton, P and H Huang (2017), ‘DP12157 The Capital Structure of Nations‘, CEPR Discussion Paper No. 12157. CEPR Press, Paris & London. https://cepr.org/publications/dp12157