- Person
- Franco Modigliani
- Lived
- 1918–2003
- Field
- Economics & finance
- From
- Italian-American
The story
By the 1960s Franco Modigliani was one of the leading figures in macroeconomics. A refugee from Fascist Italy who had built his career at the University of Illinois, Carnegie Tech and, from 1962, MIT, he combined economic theory with careful statistical work. He credited that habit to his teacher Jacob Marschak, who taught him to build theories that could be tested and to let theory guide empirical research.
Those were years of fierce argument over how much money and government spending matter for the economy. In the 1960s Modigliani and Albert Ando wrote a response to a 1963 paper by Milton Friedman and David Meiselman, starting what became known as the monetary and fiscal policy debate among economists. Policymakers wanted tools that could settle such questions with numbers.
In the late 1960s Modigliani took major responsibility for designing a large-scale econometric model of the US economy, sponsored by the Federal Reserve under contract. It was known as the MPS model, after its partners: MIT, the University of Pennsylvania and the Social Science Research Council.
Writing in 1985, the year he won the Nobel Memorial Prize, Modigliani noted that the Federal Reserve was still using the model, and he regarded it as part of his wider work on stabilisation policy and on the effects of and cures for inflation. The model has been described as a tool that guided monetary policy in Washington for many decades. Modigliani also served as a consultant to the US Treasury, the Federal Reserve System and a number of European banks.
The work also reflected Modigliani's conviction that economics should serve the public. Late in life he remained an influential adviser on policy, and a model of this kind allows policymakers to explore how a change in interest rates might ripple through the economy before they make decisions that affect jobs, prices and borrowing costs for millions of people.
Why it matters
Modigliani's model helped central bankers make better-informed decisions that affect jobs, prices and interest rates for millions of people.
About Franco Modigliani
Rome-born economist who fled Mussolini’s racial laws and, at MIT, explained how people save over a lifetime and how firms are valued, winning the 1985 Nobel Prize.
More about Franco Modigliani
- Franco Modigliani bridged Keynes and classical economicsFranco Modigliani’s 1944 doctoral paper, “Liquidity Preference and the Theory of Interest and Money”, integrated Keynes’s revolution with classical economics.
- Franco Modigliani explained how people save over a lifetimeWith his student Richard Brumberg, Franco Modigliani developed the life-cycle hypothesis of saving in 1953–54, a key reason for his 1985 Nobel Prize.
- Franco Modigliani introduced the NIRU unemployment conceptIn 1975 Franco Modigliani and his former student Lucas Papademos introduced the NIRU, the non-inflationary rate of unemployment, a concept still debated in monetary policy.
- Franco Modigliani helped found rational expectationsAt Carnegie Tech, Franco Modigliani and Emile Grunberg published a paper on predicting social events when people react to predictions, a pillar of rational expectations theory.
- Franco Modigliani inspired generations of MIT studentsFranco Modigliani taught at MIT for about 40 years. Paul Samuelson called him a great teacher whose students included Nobel laureate Robert Merton.
- Franco Modigliani’s theorem reshaped corporate financeIn 1958 Franco Modigliani and Merton Miller showed that, under certain assumptions, a firm’s value does not depend on whether it is financed by debt or by shares.
Sources
- Franco Modigliani: Biographical NobelPrize.org
- Franco Modigliani Wikipedia
- Nobel laureate Franco Modigliani dies at 85 MIT News
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