Franco Modigliani was once as soon as a Neo-Keynesian economist who received the Nobel Prize in 1985. Modigliani was once as soon as born in 1918 in Rome, Italy and later were given right here to america at the outbreak of International Struggle II. He is perfect conceivable identified for his contributions to consumption concept, financial economics, and for the idea he complex, referred to as the Modigliani-Miller Theorem of corporate finance.
Key Takeaways
- Franco Modigliani was once as soon as a Neo-Keynesian economist, perfect conceivable identified for his development of the Modigliani-Miller Theorem of corporate finance.
- Modigliani’s early educational occupation was once as soon as devoted to advocating fascist (and later socialist) central planning of the commercial gadget forward of transitioning to a Neo-Keynesian technique to macroeconomics.
- He was once as soon as awarded the Nobel Prize in Economics in 1985 for his art work throughout the fields of consumption concept and corporate finance.
- Modigliani’s life-cycle concept asserts that individuals borrow early in their careers when incomes are at their lowest and save further later in their careers when incomes are higher.
- The Modigliani-Miller concept states that a company’s capital development does not have an effect on its value when financial markets serve as effectively.
Investopedia / Hugo Lin
Early Lifestyles and Education
Franco Modigliani was once as soon as born on June 18, 1918, in Rome, Italy to a physician father and social worker mother. When Franco was once as soon as 13, his father passed away from complications from surgical process. For a few years following his father’s loss of life, he struggled to excel academically. Alternatively, after changing high faculties, he thrived, graduating early to attend the Sapienza School of Rome.
Modigliani to begin with studied legislation, then again later immigrated to america, where he received his doctorate in economics from the New School for Social Research. He taught at Bard School at Columbia School forward of serving as a professor at the School of Illinois at Urbana-Champaign, Carnegie Mellon School, and the Massachusetts Institute of Generation.
Modigliani served as president of the American Monetary Association, the American Finance Association, and the American Econometric Society. He moreover worked as an advertising guide to Italian banks and politicians, the U.S. Treasury, the Federal Reserve Software (FRS), and sat on the board of plenty of European banks. He was once as soon as awarded the Nobel Prize in Economics in 1985 for his development of models of private consumption and corporate finance.
Notable Accomplishments
Modigliani’s early contributions were throughout the field of socialism and centrally-planned economies, for which he was once as soon as given an award by the use of Italian fascist dictator Benito Mussolini. His most notable contributions to economics come along with his life-cycle consumption concept and the Modigliani-Miller Theorem of corporate finance. He moreover made very important contributions to the theories of rational expectations and the non-accelerating inflation price of unemployment (NAIRU).
Lifestyles-Cycle Consumption Thought
No doubt one in all Modigliani’s early contributions to economics was once as soon as the life-cycle consumption concept, which says that individuals principally lower your expenses all through their early years to pay for their later years. The idea is that individuals make a choice a moderately forged degree of consumption, borrowing (or spending down monetary financial savings passed immediately to them) while more youthful, saving all through heart age when source of revenue are high, and spending down monetary financial savings in retirement. This introduces age demographics as a component this is serving to to come to a decision a Keynesian consumption function for the commercial gadget.
Modigliani-Miller Theorem
His other major contribution, in cooperation with Merton Miller, was once as soon as the Modigliani-Miller (M&M) theorem, which formed the basis for capital development analysis in corporate finance. Capital development analysis helps corporations come to a decision some of the perfect and beneficial tactics to fund their corporations through a mixture of equity and debt.
The Modigliani-Miller theorem argues that if financial markets are setting pleasant, this combination will make no difference for the price of the corporate. This theorem would cross immediately to form the basis of a large number of fresh corporate finance.
Revealed Works
In his early occupation in Italy, and then in america, Modigliani wrote widely on the potential for rational keep an eye on of a command financial gadget by the use of a central planner. While a student in Rome, he won a national essay contest for a paper arguing in want of government regulate of the commercial gadget.
He wrote a series of papers forward of International Struggle II in want of fascist regulations of economic keep an eye on by the use of the state, later transitioning to want market, socialist-style central planning of prices and production in a 1947 paper. This art work was once as soon as revealed in Italian and was once as soon as a lot much less influential than his other art work until it was once as soon as translated into English throughout the mid-2000s.
Modigliani made a fundamental contribution to the idea of rational expectations in a 1954 paper, which argued that individuals modify their monetary habits in line with the impact that they expect government protection to have on them. Ironically, rational expectation concept can also be complex by the use of other economists into a vital and wide-ranging criticism of the effectiveness of Keynesian macroeconomic protection (which Modigliani championed).
In a 1975 paper, Modigliani argued that monetary policymakers should function output and employment in environment protection. The right kind function, he proposed, would be the non-inflationary price of unemployment, which he estimated at about 5.5%. Ironically, even if his paper was once as soon as explicitly adversarial to monetarism and in want of Keynesianism, his idea would cross immediately to be complex into the idea of the non-accelerating inflation price of unemployment (NAIRU), which would possibly turn into an impressive critique against Keynesian macroeconomic protection.
Franco chronicled his life as an economist in his 2001 autobiography Adventures of an Economist. Two years after its newsletter, Franco passed away.
Did Franco Modigliani Win the Nobel Prize?
Franco Modigliani won the Sveriges Riksbank Prize in Monetary Sciences Nobel Prize in 1985 for his contributions to monetary concept, specifically the life-cycle concept, and extensive research on financial markets.
What Is Franco Modigliani Perfect Recognized for?
Franco Modigliani is perfect conceivable identified for his life-cycle consumption concept and the Modigliani-Miller theorem. The life-cycle consumption concept states that individuals save all through their operating years to fund retirement. The Modigliani-Miller concept states that the combination of debt and equity does not have an effect on the price of a company when financial markets are setting pleasant.
What Was once as soon as Modigliani’s Position on Monetary Protection?
Modigliani believed that policymakers should focus on output and the non-inflationary price of unemployment when making protection choices. His position formed the idea of the non-accelerating inflation price of unemployment (NAIRU).
The Bottom Line
Franco Modigliani was once as soon as a Nobel Prize-winning Italian economist highly regarded for his contributions to economics. His life-cycle consumption concept outlined how people borrow, spend, and save all through different stages of their lives. The Modigliani-Miller Theorem, co-developed with Merton Miller, argues {{that a}} corporate’s value is not affected by its equity and debt mix when financial markets run effectively. His theories not most straightforward revolutionized the sphere of economics however as well as slightly a large number of industries similar to corporate finance.
