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On the dynamic capital structure of nations: Theory and empirics

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  • Ni, Yinan
  • Barth, James R.
  • Sun, Yanfei

Abstract

We develop a dynamic model of the optimal capital structure of a nation from a corporate finance perspective. A stochastic model is developed to determine the optimal combination of fiat money, domestic-currency debt, and foreign-currency debt for a nation to fund economic growth and development. We then test the implications of the model based on an analysis of data for 22 emerging economies. Consistent with the theoretical model, our findings indicate that the combination of money and debt depends on the trade-off between the inflation risk of fiat money and domestic-currency debt, and the default risk of foreign-currency debt.

Suggested Citation

  • Ni, Yinan & Barth, James R. & Sun, Yanfei, 2022. "On the dynamic capital structure of nations: Theory and empirics," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001131
    DOI: 10.1016/j.ribaf.2022.101725
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    More about this item

    Keywords

    Dynamic capital structure; Stochastic model; Inflation risk; Default risk;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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