For Robert Mundell, the father of contemporary international macroeconomics and finance, the only closed economy was that of the world.
The Canadian-born economist, who has died at the age of 88, played a leading role in the birth of “supply-side economics” and was a strong proponent of the European single currency.
He won the Nobel Prize for economics in 1999 “for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas”. Hugely influential, all subsequent scholars and policymakers work within the framework he created.
Mundell — always known as Bob — was born in Kingston, Ontario, in 1932. His father, William Campbell Mundell, was a military officer; his mother, Lila, was reportedly an heiress. Initially educated in a one-room schoolhouse, when he was 13 the family moved to British Columbia. He later went to the University of British Columbia and the University of Washington and did his postgraduate studies at the London School of Economics and MIT.
Mundell did his most professionally creative work at the IMF in the early 1960s and the University of Chicago, where he worked from 1965 to 1972. At that time, floating exchange rates and free movement of capital were unfamiliar. But Canada had adopted a floating currency in the 1950s, whichinfluenced his thinking.
Mundell extended the Keynesian “IS-LM” model developed by the British economist Sir John Hicks in the 1930s to the internationally open economy. His analysis showed that there could only be two of “the impossible trinity” of fixed exchange rates, an independent monetary policy and free capital movement.
This became a fundamental proposition of international macroeconomics. It helps explain why floating exchange rates became widely accepted once countries had decided upon free capital movement and monetary policy autonomy. For the same reason, the European (especially French) desire for fixed exchange rates led to monetary union and the creation of the European Central Bank.
Mundell’s other area of influential research was on optimal currency areas. In a 1961 seminal paper, he stressed the advantages of a single currency for lowering transaction costs and uncertainty, while emphasising the possible adjustment costs this could create, especially the difficulty of maintaining full employment when regions are subject to different shocks.
Subsequently, Mundell threw his intellectual weight behind two important policy projects: supply-side economics and the European single currency. In the early 1970s, he argued that stagflation could be defeated by letting central banks control inflation, while lower tax rates would increase output. At the time, this idea was seized upon by conservative journalists and politicians and it remains politically influential to this day.
It is an exaggeration to call Mundell the “father of the euro”, but he did give intellectual legitimacy to the idea of a single currency. Given that his work on optimal currency areas had emphasised the difficulty of adjustment to regional shocks, this might seem surprising. But he came to view exchange rate instability and monetary autonomy as aspects of global monetary disorder. After the collapse of the Bretton Woods system of fixed exchange rates, he called for exchange rate stability among the main currencies, a return to the gold standard, or even a global currency.
Mundell’s influence went beyond his own writings. He taught the late Rudiger Dornbusch, who taught at MIT; Jacob Frenkel, subsequently chief economist at the IMF and governor of the Bank of Israel; the late Michael Mussa, also chief economist at the IMF; and Carmen Reinhart, who was his pupil at Columbia and is now the World Bank’s chief economist.
In 1969, Mundell bought Santa Colomba, a crumbling renaissance palazzo near Siena. Decades later he used the money from his Nobel Prize to repair and refurbish the edifice. Every year he held a conference there, bringing together economists and policymakers from all over the world, including China. It was a marvellously eccentric gathering: part conference, part court, part reunion of old friends and part family party, held in a place of timeworn magnificence.
Mundell died at Santa Colomba on 4 March 2021. He leaves behind his second wife, Valerie Natsios-Mundell, a son and a daughter from his first marriage (one son predeceased him) and a son from his second.
martin.wolf@ft.com
Source: Economy - ft.com
