Franco Modigliani (Italian: [ˈfraŋko modiʎˈʎaːni]; June 18, 1918 – September 25, 2003) was an Italian-American economist and the recipient of the 1985 Nobel Memorial Prize in Economics. He was a professor at UIUC, Carnegie Mellon University, and MIT.
Modigliani in 2000
|Born||June 18, 1918|
|Died||September 25, 2003 (aged 85)|
|Institutions||Carnegie Mellon University|
University of Illinois at Urbana–Champaign
|Neo-Keynesian economics Chicago School of economics Carnegie School|
|Alma mater||The New School (PhD)|
Sapienza University of Rome (BA)
|Influences||J. M. Keynes, Jacob Marschak|
|Information at IDEAS / RePEc|
He entered college at the age of seventeen, enrolling in the faculty of Law at the Sapienza University of Rome. A few years before, in 1936, his submission to a nationwide contest in economics, sponsored by the official student organization of the state, had won first prize and Modigliani received an award from the hand of Benito Mussolini. Among his early works in fascist Italy was an article about the organization and management of production in a socialist economy, written in Italian and arguing the case for socialism along lines laid out by earlier market socialists like Abba Lerner and Oskar Lange.
After the passage of racial laws in Italy, in 1938, Modigliani left Italy for Paris together with his then-girlfriend, Serena Calabi, to join her parents there. After briefly returning to Rome to discuss his doctoral thesis at the city's University, he obtained his diploma on 22 July 1939, and returned to Paris.
The same year, they all emigrated to the United States and he enrolled at the Graduate Faculty of the New School for Social Research. His degree thesis, an elaboration and extension of John Hicks's IS–LM model, was written under the supervision of Jacob Marschak and Abba Lerner, in 1944,[note 1] and is considered "ground breaking."
From 1942 to 1944, Modigliani taught at Columbia University and Bard College as an instructor in economics and statistics. In 1946, he became a naturalized citizen of the United States. In 1948, he joined the University of Illinois at Urbana–Champaign faculty. From 1952 to 1962, he was a member of the Carnegie Mellon University faculty.
Modigliani, from the 1950s, is the originator of the life-cycle hypothesis, which attempts to explain the level of saving in the economy. In the hypothesis it is proposed that consumers aim for a stable level of consumption throughout their lifetime (for example by saving during their working years and then spending during their retirement).
When he was a member of the Carnegie Mellon University faculty, he formulated in 1958, along with Merton Miller, the Modigliani–Miller theorem for corporate finance. The theorem posits that, under certain assumptions,[note 2] the value of a firm is not affected by whether it is financed by equity (selling shares) or by debt (borrowing money), meaning that the debt-to-equity ratio is unimportant for private firms.
In the early 1960s, his response, co-authored with Albert Ando, to the 1963 paper of Milton Friedman and David I. Meiselman, initiated the so-called "monetary/fiscal policy debate" among economists, which went on for more than sixty years.
In 1975, Modigliani, in a paper whose co-author was his former student Lucas Papademos,[note 3] introduced the concept of the "NIRU", the non-inflationary rate of unemployment,[note 4] ostensibly an improvement over the "natural rate of unemployment" concept. The terms refer to a level of unemployment below which inflation rises.[note 5]
In 1997, Modigliani and his granddaughter, Leah Modigliani, developed what is now called the "Modigliani Risk-Adjusted Performance," a measure of the risk-adjusted returns of an investment portfolio that was derived from the Sharpe ratio, adjusted for the risk of the portfolio relative to that of a benchmark, e.g. the "market."
In 1985, Modigliani received MIT's James R. Killian Faculty Achievement Award. In 1997, he received an honoris causa degree in Management Engineering from the University of Naples Federico II in 1997.
Late in his life, Modigliani became a trustee of the Economists for Peace and Security organization, formerly "Economists Allied for Arms Reduction" and was considered an "influential adviser": in the late 1960s, on a contract with the Federal Reserve, he designed the "MIT-Pennsylvania-Social Science Research Council" model, a tool that "guided monetary policy in Washington for many decades."
Modigliani's work on fiscal policy came under criticism from followers of Post-Keynesian economics, who disputed the "Keynesianism" of his viewpoints, pointing out his contribution to the NAIRU concept, as well as his general stance on fiscal deficits. The Modigliani-Miller theorem implies that, for a closed economy, state borrowing is merely deferred taxation, since state spending can be financed only by "printing money", taxation, or borrowing, and therefore monetary financing of state spending implies the subsequent imposition of a so-called "inflation tax," which ostensibly has the same effect on permanent income as explicit taxation.[note 6]
Nonetheless, they acknowledged his dissenting voice on the issue of unemployment, where Modigliani concurred early on with heterodox economists that Europe-wide unemployment in the late 20th century was caused by the lack of demand induced by austerity policies.[note 7]
In 1939, while they were in Paris, after having left Italy, Modigliani married Serena Calabi. They had two children, Andre and Sergio Modigliani. Their grandchildren were Leah, Julia, David, and Amelia, and their great-grandchildren Micaela, Sophia, Serena, and Chiara. When Franco Modigliani took the job at MIT, the couple bought a home on North Road overlooking Vineyard Sound, near Chilmark, where they lived for the rest of their lives.
Modigliani died in Cambridge, Massachusetts, in 2003, while still working at MIT, and teaching until the last months of his life. Serena Modigliani-Calabi, active to the end in progressive politics, most notably with the League of Women Voters, and an outspoken believer in participatory democracy, died in 2008.
| Laureate of the Nobel Memorial Prize in Economics
James M. Buchanan Jr.
The American Economic Association (AEA) is a learned society in the field of economics, headquartered in Nashville, Tennessee. It publishes one of the most prestigious academic journals in economics: the American Economic Review. The AEA was established in 1885 in Saratoga, New York by younger progressive economists trained in the German historical school, including Richard T. Ely, Edwin Robert Anderson Seligman and Katharine Coman, the only woman co-founder; since 1900 it has been under the control of academics.The purposes of the Association are: 1) The encouragement of economic research, especially the historical and statistical study of the actual conditions of industrial life; 2) The issue of publications on economic subjects; 3) The encouragement of perfect freedom of economic discussion. The Association as such will take no partisan attitude, nor will it commit its members to any position on practical economic questions. Its current president is Olivier Blanchard of Peterson Institute for International Economics.Once composed primarily of college and university teachers of economics, the Association now attracts an increasing number of members from business and professional groups. Today the membership is about 18,000, over half of whom are academics. About 15% are employed in business and industry, and the remainder largely by federal, state, and local government or other not-for-profit organizations.Charles C. Holt
Charles C. Holt (21 May 1921 – 13 December 2010) was Professor at the Department of Management at the McCombs School of Business at the University of Texas at Austin. He is well known for his contributions (and for the contributions of his student, Peter Winters) to exponential smoothing.Holt holds BS and MS degrees from the Massachusetts Institute of Technology (1944). He later earned a MA (1950) and a PhD (1955) from the University of Chicago.Cowles Foundation
The Cowles Foundation for Research in Economics is an economic research institute at Yale University. It was founded in Colorado Springs in 1932 by Alfred Cowles, a businessman and economist, as the Cowles Commission for Research in Economics. In 1939, the Cowles Commission moved to the University of Chicago under the directorship of Theodore O. Yntema. Jacob Marschak took over as director in 1943 until 1948, when it was passed over to Tjalling C. Koopmans. Rising hostile opposition to the Cowles Commission by the department of economics at University of Chicago during the 1950s led Koopmans to convince the Cowles family to move it to Yale University in 1955 (where it was renamed the Cowles Foundation).As its motto (Theory and Measurement) indicates, the Cowles Commission was dedicated to the pursuit of linking economic theory to mathematics and statistics. Its main contributions to economics lie in its creation and consolidation of two important fields: general equilibrium theory and econometrics.
The thrust of the Cowles approach was a specific, probabilistic framework in estimating simultaneous equations to model an economy. Its ultimate goal in doing so was to gain policy insight. The Cowles approach structured its models from a priori economic theory. One of its main contributions was in exposing the bias of ordinary least squares regression in identifying coefficient estimates. Consequently, Cowles researchers developed new methods such as the indirect least squares, instrumental variable methods, the full information maximum likelihood method, and the limited information maximum likelihood method. All of these methods used theoretical, a priori restrictions. According to an article by Carl F. Christ, the Cowles approach was grounded on the following assumptions: 1, simultaneous economic behavior; 2, linear or logarithmic equations and disturbances; 3, systematic, observable variables without error; 4, discrete variable changes as opposed to continuous; 5, a priori determination of exogeneity and endogeneity; 6, the existence of a reduced form; 7, independence of the explanatory variables; 8, a priori identified structural equations; 9, normally distributed disturbances with zero means, finite and constant covariances, a nonsingular covariance matrix, and serial independence; 10, a dynamically stable system of equations.Several Cowles associates have won Nobel prizes for research done while at the Cowles Commission. These include Tjalling Koopmans, Kenneth Arrow, Gérard Debreu, James Tobin, Franco Modigliani, Herbert A. Simon, Joseph E. Stiglitz, Lawrence Klein, Trygve Haavelmo, Leonid Hurwicz and Harry Markowitz.
The Cowles Foundation is located at 30 Hillhouse Avenue, New Haven, Connecticut.David Thesmar
David Thesmar (born in France on March 7, 1972) is a French economist who currently works as Franco Modigliani Professor Financial Economics at the MIT Sloan School of Management. His research interests include corporate finance, financial intermediation, entrepreneurship and behavioural economics. In 2007, he was awarded the Prize of the Best Young Economist of France.List of Italian Nobel laureates
Since 1906, 20 Italians have been awarded the Nobel Prize.List of Jewish American economists
This is a list of famous Jewish American economists. For other famous Jewish Americans, see List of Jewish Americans. For other economists, see List of Jewish economists.
Alan Greenspan, former Chair of the US Federal Reserve Bank
Alvin E. Roth, Nobel Prize (2012)
Amy Finkelstein, Professor of Economics at the Massachusetts Institute of Technology (MIT), the co-Director and research associate of the Public Economics Program at the National Bureau of Economic Research, and the co-Scientific Director of J-PAL North America.
Anna Schwartz, economist who published A Monetary History of the United States, 1867–1960 (1963), which laid a large portion of the blame for the Great Depression at the door of the Federal Reserve System. President of the Western Economic Association International (1988)
Arthur F. Burns, economic adviser to the Eisenhower administration (1953) and Chairman to the Federal Reserve (1970)
Barry Eichengreen, professor at University of California, Berkeley
Ben Bernanke, former Chair of the US Federal Reserve Bank
Daniel Kahneman, Nobel Prize (2002)
David D. Friedman, son of Milton Friedman
Edwin Robert Anderson Seligman
Eric Maskin, Nobel Prize (2007)
Franco Modigliani, Nobel Prize (1985)
Gary Becker, Nobel Prize (1992)
George Akerlof, Nobel Prize (2001)
Harry Markowitz, Nobel Prize (1990)
Herbert A. Simon, Nobel Prize (1978)
Israel Meir Kirzner
Janet Yellen, Chair of the US Federal Reserve Bank
Jeffrey Sachs, director of the Earth Institute at Columbia University
John Harsanyi, Nobel Prize (1994)
Joseph Stiglitz, Nobel Prize (2001)
Kenneth Arrow, Nobel Prize (1972)
Lawrence Klein, Nobel Prize (1980)
Leonid Hurwicz, Nobel Prize (2007)
Martin Feldstein, Harvard Professor; Chair of the Council of Economic Advisors in the Reagan Administration
Mary M. Cohen, social economist, writer
Merton Miller, Nobel Prize (1990)
Milton Friedman, Nobel Prize (1976)
Murray Rothbard, wtiter, Austrian School economist, anarcho-capitalist, libertarian writer
Myron Scholes, Nobel Prize (1997)
Nouriel Roubini, Iranian-American macroeconomist
Paul Krugman, Nobel Prize (2008)
Paul Samuelson, Nobel Prize (1970)
Peter Diamond, Nobel Prize (2010)
Rashi Fein, health economist
Robert Aumann, Nobel Prize (2005)
Robert Fogel, Nobel Prize (1993)
Robert O. Mendelsohn, environmental economist
Robert Solow, Nobel Prize (1987)
Roger Myerson, Nobel Prize (2007)
Russ Roberts, host of EconTalk
Simon Kuznets, Nobel Prize (1971)
Stanley Fischer, economist and the vice chair of the U.S. Federal Reserve System
Toby Moskowitz, financial economist
Walter Block, Harold E. Wirth Endowed Chair in Economics at Loyola University in New Orleans
Wassily Leontief, Nobel Prize (1973)
Yoram BarzelList of Presidents of the Econometric Society
In the scientific discipline of economics, the Econometric Society is a learned society devoted to the advancement of economics by using mathematical and statistical methods. This article is a list of its (past and present) Presidents.MIT Department of Economics
The MIT Department of Economics is a department of the Massachusetts Institute of Technology in Cambridge, Massachusetts.
Undergraduate studies in economics were introduced in the 19th century by institute president Francis Amasa Walker, while the department's Ph.D. program was introduced in 1941. It is one of the "big five" schools in the field along with the faculties at the University of Chicago, Harvard, Princeton, and Stanford (these schools have consistently ranked as the top five schools in the country since graduate school rankings have been produced by U.S. News & World Report). The American Economics Association estimates that MIT and these peers produce half of all tenure track professors at U.S. research universities. Half of all John Bates Clark Medal recipients since 1999 were Ph.D. students at MIT, while the department has the second highest number of Nobel Prize winning students and faculty in economics in the world after the University of Chicago.Michael Szenberg
Michael Szenberg (born 1934) is a professor emeritus and past Chairman of the Finance and Economics department at Pace University's Lubin School of Business. He was the editor of The American Economist.Modigliani–Miller theorem
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing stock or selling debt, the Modigliani–Miller theorem is often called the capital structure irrelevance principle.
The key Modigliani-Miller theorem was developed in a world without taxes. However, if we move to a world where there are taxes, when the interest on debt is tax deductible, and ignoring other frictions, the value of the company increases in proportion to the amount of debt used. And the source of additional value is due to the amount of taxes saved by issuing debt instead of equity.
Modigliani was awarded the 1985 Nobel Prize in Economics for this and other contributions.
Miller was a professor at the University of Chicago when he was awarded the 1990 Nobel Prize in Economics, along with Harry Markowitz and William F. Sharpe, for their "work in the theory of financial economics", with Miller specifically cited for "fundamental contributions to the theory of corporate finance".NAIRU
NAIRU is an acronym for non-accelerating inflation rate of unemployment, and refers to a level of unemployment below which inflation rises. It was first introduced as NIRU (non-inflationary rate of unemployment) by Franco Modigliani and Lucas Papademos in 1975, as an improvement over the "natural rate of unemployment" concept, which was proposed earlier by Milton Friedman.Monetary policy conducted under the assumption of a NAIRU typically involves allowing just enough unemployment in the economy to prevent inflation rising above a given target figure. Prices are allowed to increase gradually and some unemployment is tolerated.Neo-Keynesian economics
Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists (notably John Hicks, Franco Modigliani and Paul Samuelson), attempted to interpret and formalize Keynes' writings and to synthesize it with the neo-classical models of economics. Their work has become known as the neo-classical synthesis and created the models that formed the core ideas of neo-Keynesian economics. These ideas dominated mainstream economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.A series of developments occurred that shook neo-Keynesian theory in the 1970s as the advent of stagflation and the work of monetarists like Milton Friedman cast doubt on neo-Keynesian theories. The result would be a series of new ideas to bring tools to Keynesian analysis that would be capable of explaining the economic events of the 1970s. The next great wave of Keynesian thinking began with the attempt to give Keynesian macroeconomic reasoning a microeconomic basis. The new Keynesians helped create a "new neoclassical synthesis" that currently forms the mainstream of macroeconomic theory.Following the emergence of the new Keynesian school, neo-Keynesians have sometimes been referred to as Old-Keynesians.Paul Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize in 1970, that he "has done more than any other contemporary economist to raise the level of scientific analysis in economic theory". Economic historian Randall E. Parker has called him the "Father of Modern Economics", and The New York Times considered him to be the "foremost academic economist of the 20th century".Samuelson was likely the most influential economist of the later 20th century. In 1996, when he was awarded the National Medal of Science, considered to be America's top science-honor, President Bill Clinton commended Samuelson for his "fundamental contributions to economic science" for over 60 years. Samuelson considered mathematics to be the "natural language" for economists and contributed significantly to the mathematical foundations of economics with his book Foundations of Economic Analysis. He was author of the best-selling economics textbook of all time: Economics: An Introductory Analysis, first published in 1948. It was the second American textbook that attempted to explain the principles of Keynesian economics. It is now in its 19th edition, having sold nearly 4 million copies in 40 languages, including Russian, French, Greek, Slovak, Chinese, Portuguese, German, Spanish, Polish, Japanese, Czech, Vietnamese, Hungarian, Indonesian, Swedish, Croatian, Dutch, Turkish, Hebrew, Italian, and Arabic. James Poterba, former head of MIT's Department of Economics, noted that by his book, Samuelson "leaves an immense legacy, as a researcher and a teacher, as one of the giants on whose shoulders every contemporary economist stands".He entered the University of Chicago at age 16, during the depths of the Great Depression, and received his PhD in economics from Harvard. After graduating, he became an assistant professor of economics at Massachusetts Institute of Technology (MIT) when he was 25 years of age and a full professor at age 32. In 1966, he was named Institute Professor, MIT's highest faculty honor. He spent his career at MIT where he was instrumental in turning its Department of Economics into a world-renowned institution by attracting other noted economists to join the faculty, including Robert M. Solow, Franco Modigliani, Robert C. Merton, Joseph E. Stiglitz, and Paul Krugman, all of whom went on to win Nobel Prizes.
He served as an advisor to Presidents John F. Kennedy and Lyndon B. Johnson, and was a consultant to the United States Treasury, the Bureau of the Budget and the President's Council of Economic Advisers. Samuelson wrote a weekly column for Newsweek magazine along with Chicago School economist Milton Friedman, where they represented opposing sides: Samuelson, as a self described "Cafeteria Keynesian", claimed taking the Keynesian perspective but only accepting what he felt was good in it. By contrast, Friedman represented the monetarist perspective. Samuelson died on 13 December 2009, at the age of 94.Robert Solow
Robert Merton Solow, GCIH (; born August 23, 1924), is an American economist, particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Massachusetts Institute of Technology, where he has been a professor since 1949. He was awarded the John Bates Clark Medal in 1961, the Nobel Memorial Prize in Economic Sciences in 1987, and the Presidential Medal of Freedom in 2014. Four of his PhD students, George Akerlof, Joseph Stiglitz, Peter Diamond and William Nordhaus later received Nobel Memorial Prizes in Economic Sciences in their own right.Shareholder yield
The term shareholder yield captures the three ways in which the management of a public company can distribute cash to shareholders: cash dividends, stock repurchases and debt reduction.Stephen Ross (economist)
Stephen Alan "Steve" Ross (February 3, 1944 – March 3, 2017) was the inaugural Franco Modigliani Professor of Financial Economics at the MIT Sloan School of Management after a long career as the Sterling Professor of Economics and Finance at the Yale School of Management. He is known for initiating several important theories and models in financial economics. He is a widely published author in finance and economics, and is coauthor of one of the best-selling Corporate Finance texts.He received his B.S. with honors from Caltech in 1965 where he majored in physics, and his Ph.D. in economics from Harvard in 1970, and has taught at the University of Pennsylvania, Yale School of Management, and MIT.
Ross is best known for the development of the arbitrage pricing theory (mid-1970s) as well as for his role in developing the binomial options pricing model (1979; also known as the Cox–Ross–Rubinstein model). He was an initiator of the fundamental financial concept of risk-neutral pricing. In 1985 he contributed to the creation of the Cox–Ingersoll–Ross model for interest rate dynamics. Such theories have become an important part of the paradigm known as neoclassical finance.
Ross also introduced a rigorous modeling of the agency problem in 1973, as seen from the principal's standpoint. Ross served as President of the American Finance Association in 1988. He was named International Association of Financial Engineers' Financial Engineer of the Year in 1996.
He gave the inaugural lecture of the Princeton Lectures in Finance, sponsored by the Bendheim Center for Finance of Princeton University, in 2001. It became a book in 2004, presenting neoclassical finance and defending it, including such notions as the efficiency and rationality of markets, against its critics, especially those who belong to the behavioral finance tradition.
Ross is a recipient of a 2006 Smith Breeden Prize, as well as a 2015 Deutsche Bank Prize for developing models used for assessing prices for options and other assets in the last 30 years.Tax shield
A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield. Since a tax shield is a way to save cash flows, it increases the value of the business, and it is an important aspect of business valuation.Tepper School of Business
The Tepper School of Business is the business school of Carnegie Mellon University. It is located in the university’s 140-acre (0.57 km2) campus in Pittsburgh, Pennsylvania, US.
The school offers degrees from the undergraduate through doctoral levels, in addition to executive education programs.
The Tepper School of Business was originally known as the Graduate School of Industrial Administration (GSIA), which was founded in 1949 by William Larimer Mellon. In March 2004, the school received a record $55 million gift from alumnus David Tepper and was renamed the "David A. Tepper School of Business at Carnegie Mellon".
A number of Nobel Prize–winning economists have been affiliated with the school, including Herbert A. Simon, Franco Modigliani, Merton Miller, Robert Lucas, Edward Prescott, Finn Kydland, Oliver Williamson, Dale Mortensen, and Lars Peter Hansen.