Remember Robert Mundell: The economist left an indelible mark on the pitch

Nobel laureate in economics Robert Mundell in an interview with Reuters in Valencia, Spain, in 2008. (Heino Kalis / Reuters)

Mundell has left an indelible mark in the field of international economics.

Robert Mundell – The Nobel-winning Canadian-American economist, father of the euro and one of the most influential academic economists in recent history – died last week.

Mundell won the Nobel Prize for his brilliant work on monetary policy and trade, widely published in the late 1950s and early 1960s, dating back to his early days as a student at MIT and an economist at the IMF. He built one of the most influential open economy models of the 20th century: the Mundell-Fleming model, which showed that economies could not simultaneously have fixed exchange rates, monetary autonomy and free capital flows, also known as the “Mundell-Fleming trilemma”. He has also written many excellent theory related articles on trade, including on mobility of production factors.

Politically, Mundell also strongly influenced the first movement on the supply side. He was a professor at the University of Chicago from 1965 to ’72, overlapping with Art Laffer, who taught at the University of Chicago from 1967 to ’76. Mundell’s influence on the Reagan era and his embrace of the supply economy cannot be understated.

However, his most famous and perhaps most enduring influence came in the field of monetary policy, as an advocate of fixed exchange rates in what he saw as optimal currency areas. This advocacy for fixed exchange rates contrasted sharply with the support of his fellow UCicago economist, Milton Friedman, for floating exchange rates.

The epic debates between Mundell and Friedman over exchange rates began in the early 1960s when the Bretton Woods fixed exchange rate system still reigned (most countries pegged their currencies to the U.S. dollar, which in turn was linked to gold).

Around this time, in 1953, Friedman published an essay titled “The Case for Flexible Exchange Rates” in his now famous book. Essays in positive economics. Friedman’s main argument (which I find most convincing myself) is that fixed exchange rates can cause inflation to import from other countries due to the purchasing power parity requirement, and that without flexible exchange rates, price spikes in one country must arise in the next. Friedman argued that a fixed exchange rate regime wouldn’t last long before the risk of inflation encouraged economies to float their currencies.

This argument ultimately won when Richard Nixon ended gold-dollar convertibility in response to rising inflation in the 1970s, and Bretton Woods was slowly replaced de facto by the current exchange rate regime. floating. Nonetheless, throughout the late 20th century, Friedman and Mundell frequently clashed over the subject. Mundell believed that trade flows were very sensitive to exchange rates and argued that floating exchange rates and a volatile dollar were responsible for the US recessions in the early 1980s as well as the Great Recession much later.

Interestingly, like Paul Krugman points out, Mundell’s academic work and political views on exchange rates were in part influenced by his Canadian origins (he grew up in Ontario and British Columbia) and by the fluctuation of the Canadian dollar / US dollar exchange rate in the 1950s, the first large currency to float in the post-war era. Canada experienced a rather nasty and prolonged recession in the late 1950s, which Mundell attributed in part to the new floating stock exchange. Mundell viewed Canada’s return to a fixed exchange rate in 1962 as a wise move (Canada would later begin to float its currency again in 1970 and have been since).

And although Friedman won the Bretton Woods debate, Mundell would later retaliate in the debate over a fixed exchange rate system in Europe, which would ultimately become the euro. Mundell also argued for a North American monetary union in the early 2000s, but to no avail.

In December 2000, the Financial post Commentary pages directed by Terence Corcoran orchestrated the Nobel Silver Duel, a long debate between Robert Mundell and Milton Friedman. Mundell said: “The advent of the euro has shown everyone how successful a well-planned fixed exchange rate zone can be. “

Friedman, however, responded prophetically:

If the existence of the euro induces a significant increase in flexibility, the euro will prosper… Otherwise, as I fear, this is likely to be the case, over time, as the members of the euro undergo a flow of asynchronous shocks, economic difficulties will emerge. Different governments will be subject to very different political pressures and these will undoubtedly create political conflicts, from which the European Central Bank cannot escape.

Fast forward ten years, and the European sovereign debt crisis has exposed the vulnerability of the euro. Later, in 2016, Britain would vote to quit the European Union’s political project. What Mundell missed was the need for a fiscal union to support a monetary union.

During the debate, when asked to predict how many currencies would exist in the future, Friedman said it would depend on the success of the euro and the “wild card” in the monetary world, “the Internet. and the emergence of one or more varieties of electronic money ”, decades before digital currencies entered the common lexicon.

While Friedman can seem to have won on flexible exchange rates, Mundell and many of his supporters have not given up. Mundell’s protege and Trump’s former Federal Reserve candidate Judy Shelton famous argued for a new Bretton Woods conference to be held in Mar-a-Lago to discuss a new system of fixed exchange rates.

Mundell’s influence and brilliance is still felt around the world (regardless of the perspective on exchange rates, the Mundell-Fleming model remains arguably the most famous model of international macroeconomics informing the stabilization policy), admired by academic economists ranging from Keynesians such as Paul krugman to market monetarists like Scott sumner and suppliers such as Brian Domitrovic. Rest in peace.

Jon Hartley has a doctorate in economics. student at Stanford University and visiting scholar at the Equal Opportunities Research Foundation. He previously served as Senior Policy Advisor to the Congress Joint Economic Committee.

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