Franco Modigliani

Franco Modigliani was a Neo-Keynesian economist who received the Nobel Prize in 1985. Modigliani was brought into the world in 1918 in Rome, Italy and later came to the United States at the flare-up of World War II. He is best known for his contributions to consumption theory, financial economics, and for the theory he developed, called the Modigliani-Miller Theorem of corporate finance.

Early Life and Education

Franco Modigliani was brought into the world on June 18, 1918, in Rome, Italy to a physician father and social worker mother. At the point when Franco was 13, his dad died from entanglements from medical procedure. For a couple of years following his dad's death, he attempted to scholastically succeed. Notwithstanding, in the wake of changing high schools, he flourished, graduating right on time to go to the Sapienza University of Rome.

Modigliani initially concentrated on law, however later immigrated to the United States, where he received his doctorate in economics from the New School for Social Research. He educated at Bard College at Columbia University before filling in as a teacher at the University of Illinois at Urbana-Champaign, Carnegie Mellon University, and the Massachusetts Institute of Technology.

Modigliani filled in as leader of the American Economic Association, the American Finance Association, and the American Econometric Society. He likewise filled in as an advisor to Italian banks and lawmakers, the U.S. Treasury, the Federal Reserve System (FRS), and sat on the board of several European banks. He was awarded the Nobel Prize in Economics in 1985 for his development of models of private consumption and corporate finance.

Striking Accomplishments

Modigliani's initial contributions were in the field of socialism and centrally-arranged economies, for which he was given an award by Italian extremist despot Benito Mussolini. His most remarkable contributions to economics incorporate his life-cycle consumption theory and the Modigliani-Miller Theorem of corporate finance. He additionally made important contributions to the speculations of rational expectations and the non-accelerating inflation rate of unemployment (NAIRU).

Life-Cycle Consumption Theory

One of Modigliani's initial contributions to economics was the life-cycle consumption theory, which says that people basically set aside cash during their initial a long time to pay for their later years. The thought is that individuals favor a moderately stable level of consumption, borrowing (or spending down savings gave to them) while youthful, saving during middle age when earnings are high, and spending down savings in retirement. This presents age demographics as a factor that assists with deciding a Keynesian consumption function for the economy.

Modigliani-Miller Theorem

His other major contribution, in cooperation with Merton Miller, was the Modigliani-Miller (M&M) theorem, which formed the foundation for capital structure analysis in corporate finance. Capital structure analysis assists companies with deciding the best and beneficial ways of funding their companies through a mixture of equity and debt.

The Modigliani-Miller theorem contends that assuming financial markets are efficient, this mixture will significantly impact the value of the firm. This theorem would proceed to form the basis of a lot of modern corporate finance.

Distributed Works

In his initial career in Italy, and afterward in the United States, Modigliani composed widely on the possibility of rational management of a command economy by a central planner. While a student in Rome, he won a national exposition challenge for a paper contending for government control of the economy.

He composed a series of papers before World War II for fundamentalist principles of economic management by the state, later progressing to lean toward market, socialist-style central planning of prices and production in a 1947 paper. This work was distributed in Italian and was less powerful than his other work until it was converted into English during the 2000s.

Modigliani made a fundamental contribution to the theory of rational expectations in a 1954 paper, which contended that individuals change their economic behavior in view of the impact that they anticipate that government policy should have on them. Unexpectedly, rational expectation theory would be developed by different economists into a major and wide-ranging analysis of the effectiveness of Keynesian macroeconomic policy (which Modigliani supported).

In a 1975 paper, Modigliani contended that monetary policymakers ought to target output and employment in setting policy. The proper target, he proposed, would be the non-inflationary rate of unemployment, which he estimated at around 5.5%. Unexpectedly, however his paper was expressly against monetarism and for Keynesianism, his thought would proceed to be developed into the theory of the non-accelerating inflation rate of unemployment (NAIRU), which would turn into a strong critique against Keynesian macroeconomic policy.

Franco chronicled his life as an economist in his 2001 self-portrayal Adventures of an Economist. Two years after its publication, Franco died.

The Bottom Line

Franco Modigliani was a Nobel Prize-winning Italian economist highly respected for his contributions to economics. His life-cycle consumption theory made sense of how individuals borrow, spend, and save during various stages of their lives. The Modigliani-Miller Theorem, co-developed with Merton Miller, contends that a firm's value isn't impacted by its equity and debt mix when financial markets run efficiently. His speculations altered the field of economics as well as different industries like corporate finance.

Highlights

He was awarded the Nobel Prize in Economics in 1985 for his work in the fields of consumption theory and corporate finance.
Modigliani's initial scholastic career was committed to upholding extremist (and later socialist) central planning of the economy before progressing to a Neo-Keynesian approach to macroeconomics.
Modigliani's life-cycle theory states that individuals borrow from the get-go in their careers when livelihoods are at their most minimal and save all the more later in their careers when salaries are higher.
Franco Modigliani was a Neo-Keynesian economist, best known for his development of the Modigliani-Miller Theorem of corporate finance.
The Modigliani-Miller theory states that a company's capital structure doesn't influence its value when financial markets operate efficiently.

FAQ

What Is Franco Modigliani Best Known for?

Franco Modigliani is best known for his life-cycle consumption theory and the Modigliani-Miller theorem. The life-cycle consumption theory states that individuals save during their working a long time to fund retirement. The Modigliani-Miller theory states that the mixture of debt and equity doesn't influence the value of a company when financial markets are efficient.

What Was Modigliani's Position on Monetary Policy?

Modigliani accepted that policymakers ought to zero in on output and the non-inflationary rate of unemployment while pursuing policy choices. His position formed the theory of the non-accelerating inflation rate of unemployment (NAIRU).

Did Franco Modigliani Win the Nobel Prize?

Franco Modigliani won the Sveriges Riksbank Prize in Economic Sciences Nobel Prize in 1985 for his contributions to economic theory, explicitly the life-cycle theory, and broad research on financial markets.