Franco Modigliani

Franco Modigliani received the 1985 Nobel Prize in Economics for his analyses of the behavior of household savings and the functioning of financial markets. With Merton Miller, he developed the Modigliani-Miller theorem showing that under perfect market conditions, corporate capital structure (debt vs equity mix) doesn't affect firm value. His "life-cycle hypothesis" of savings showed that individuals smooth consumption over their lifetime, with implications for understanding national savings rates and pension policy. Modigliani was also instrumental in macroeconomic modeling, contributing to the MIT-Penn-Social Science Research Council (MPS) econometric model used by the Federal Reserve. His work on the term structure of interest rates and the interaction between equity markets and the real economy influenced generations of financial economists at major research institutions.