Franco Modigliani

Lore & Background

Modigliani was born in Rome to a Jewish family, with a pediatrician father and a social worker mother. He entered Sapienza University of Rome at age seventeen to study law. In his second year, he won a nationwide economics contest and received an award from Benito Mussolini. He wrote essays for the fascist magazine Lo Stato and an early article arguing for market socialism, but his enthusiasm for fascism evaporated after the 1938 racial laws. He left Italy for Paris with his girlfriend Serena Calabi, returned briefly to defend his laurea thesis in July 1939, then immigrated to the United States. He earned his Ph.D. at the New School for Social Research in 1944 under Jacob Marschak and Abba Lerner, with a groundbreaking dissertation extending John Hicks' IS–LM model.

Reader's Guide

Modigliani's significance lies in several foundational contributions to economics. Beginning in the 1950s, he originated the life-cycle hypothesis, which explains saving behavior as an attempt to maintain stable consumption over a lifetime. With Emile Grunberg in 1954, he co-authored a paper considered the origin of the rational expectations hypothesis. In 1958, with Merton Miller, he formulated the Modigliani–Miller theorem, which states that under certain assumptions a firm's value is independent of its debt-to-equity ratio. In the early 1960s, his response with Albert Ando to Milton Friedman and David Meiselman initiated a decades-long monetary/fiscal policy debate. In 1975, with Lucas Papademos, he introduced the NIRU (non-inflationary rate of unemployment). In 1997, with his granddaughter Leah Modigliani, he developed the Modigliani Risk-Adjusted Performance measure. His work on fiscal policy drew criticism from Post-Keynesian economists, who disputed his Keynesian credentials, though they acknowledged his dissenting view that European unemployment in the late 20th century was caused by austerity-induced lack of demand. He also designed the MIT-Pennsylvania-Social Science Research Council model for the Federal Reserve, guiding monetary policy for decades.

Did You Know?

• Modigliani received an award from Benito Mussolini after winning a nationwide economics contest in his second year at Sapienza University.
• His Ph.D. dissertation, written under Jacob Marschak and Abba Lerner, extended John Hicks' IS–LM model and is considered groundbreaking.
• He introduced the NIRU (non-inflationary rate of unemployment) concept in a 1975 paper co-authored with his former student Lucas Papademos.
• Modigliani's granddaughter Leah Modigliani co-developed the Modigliani Risk-Adjusted Performance measure in 1997.

Notable Quotes (Wikiquote)

"Franco Modigliani and Merton H. Miller. "The cost of capital, corporation finance and the theory of investment." The American economic review (1958): 261-297." — Franco Modigliani "A situation where people can grow old without having a job that rewards them individually while adding to the collective well-being is morally unacceptable." — Franco Modigliani "Franco Modigliani (2001) Adventures of an economist, p. 41." — Franco Modigliani "Modigliani's theory was a powerful searchlight on what was happening... It is the best explanation of what has actually been happening in the great swing of American life since the 1950's." — Franco Modigliani