ModiglianiMillerTribute - Preliminary and Incomplete...

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1 Preliminary and Incomplete Modigliani, the Modigliani-Miller Theorem, and Macroeconomics 1 Joseph E. Stiglitz Columbia University It is a great pleasure for me to be here on this occasion to honor the memory of Franco Modigliani. My fond remembrances of Franco Modigliani stretch from my days as a graduate student at MIT from 1963 to 1965, to my more recent encounters in Rome and Washington, D.C. Throughout that span of 40 years, Franco was an inspiration: he maintained an intellectual liveliness and depth, a personal warmth and charm, and a political commitment that was unparalleled. Franco got excited by his ideas—and deservedly so—and he conveyed that excitement to everyone that he encountered. In an academic world where too often the official stance is ponderous—every idea has to be appropriately qualified, footnoted, its intellectuals origins meticulously traced, its implications guardedly and cautiously put forward—Franco was unabashedly enthusiastic, an enthusiasm which was contagious. Franco never lost his youth. In the spring of 2003, Franco traveled from Boston to Washington to be on a panel to discuss Bush’s proposed tax cuts. His devotion to the well being of America, which he rightly felt would be hurt by these tax cuts motivated him to undertake the arduous journey, in spite of his health. He was outraged by Bush’s proposals. But it was with humor and the force of argument that he made his attack: he pointed out, for instance, the intergenerational distributional effects, and though those of his generation might benefit, the tax cuts were still a bad thing. Not long before that, I was on a panel with Franco in Rome, discussing the reforms in Social Security in Italy, a subject which had been one of his passions. It gave me such pleasure to see the reverence and esteem with which Franco was held in Italy. More than any other person, his thinking had helped shape the debates over social security reform there and elsewhere throughout the world. My topic this afternoon, however, is concerned with Franco’s impact on the development of macro-economics. His most noted contribution, of course, was the life-cycle model of savings 2 , which a half century after he formulated it, remains a mainstay of macro- 1 Paper presented to a conference, “Franco Modigliani and the Keynesian Legacy,” New School University, April 14-15, 2005. Much of the research described below has been done jointly with my colleague Bruce Greenwald, to whom I am greatly indebted. Financial support from the Ford and McArthur Foundations is gratefully acknowledged. 2 Modigliani, F. & Brumberg, R. (1954): Utility analysis and the consumption function: An interpretation of cross-section data. In: Kurihara, K.K (ed.): Post-Keynesian Economics. New Brunswick, NJ: Rutgers University Press.
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2 economic analysis. But I want to focus on the indirect contribution that he exerted on macro-economics through his pioneering work with Merton Miller on corporate finance.
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