On January 9th, 2022, the award ceremony of the 19th Sun Yefang Prize for Economic Science was held at the Chinese Academy of Social Sciences (CASS). Professor Haizhou Huang (Special-Term Professor of Finance at SAIF, Member of the Management Committee and Head of the Equity Business Department of CICC), together with Patrick Bolton (Professor of Economics and Finance at Columbia University) received the Prize for their publication The Capital Structure of Nations.
The paper applies corporate finance theory to analyze national capital structures. Comparing the capital structures of China, the United States, Japan, and the United Kingdom, the paper argues that state-issued currency and treasury bonds issued in local currency are considered equity in the capital structure of the state, whereas treasury bonds issued in foreign currency are debt.
The Sun Yefang Economic Science jury commended the publication for providing a fresh perspective for understanding monetary and fiscal policies in major economies. It also provided a unified micro-theoretical foundation for monetary economics, fiscal theory, and international finance. This paper also won the 2018 Pagano-Zechner Best Paper Award of the European Finance Association.
The Sun Yefang Economic Science Award, named in memory of the eponymous Chinese economist, is one of the most prestigious awards in Economics in China. Founded in 1984, the award is given out biennially to honor economists who have made significant contributions.
This year, the committee evaluated 115 books and 195 papers, ultimately giving awards for three of the books and four of the papers.
Abstract
When a nation can finance its investments via foreign-currency denominated debt or domestic-currency claims, what is the optimal capital structure for the nation? Building on the functions of fiat money as both medium of exchange and store of value (like corporate equity), the 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 true. 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.
