(142 Total References)
IAER May 2002
Robert A. Mundell
Distinguished Associates | International Atlantic Economic Society
Robert A. Mundell
Robert A. Mundell
International Atlantic Economic Society
Robert A. Mundell: The Concise Encyclopedia of Economics | Library of Economics and Liberty
Robert A. Mundell
| Robert A. Mundell
was awarded the 1999 Nobel Prize
in economics "for his
analysis of monetary and fiscal policy under different exchange rate regimes and his
analysis of optimum currency areas."
also considered the case of floating exchange rates.
At the time this was regarded as a theoretical curiosum because, as mentioned, all major trading countries had fixed their exchange rates with each other.
native Canada had floated its dollar from 1950 to 1962.
Possibly for that reason, and possibly because Mundell
had a sense of the future, he
thought it worthwhile to consider the floating exchange rate case. (Major countries' exchange rates have floated since the early 1970s.) Mundell
showed that if the country has a floating exchange rate, then the government has much more ability to use monetary policy.
On the other hand, fiscal policy now becomes impotent.
If the government wants to increase aggregate demand by increasing government spending, for example, then, if it does not change monetary policy, the increase in the exchange rate due to the increase in aggregate demand reduces exports.
Thus, all fiscal policy can do is change the composition of aggregate demand, not its level.
The model Mundell used in 1960 to show this is now called the Mundell-Fleming model, after Mundell and Marcus Fleming,1 who developed a similar, though less extensive, model around the same time.
Mundell also did some early work in what is now known as "the monetary approach to the balance of payments," which was actually laid out in rudimentary fashion by eighteenth-century economist David Hume.
showed how, with fixed exchange rates, an economy will adjust as balance-of-payments surpluses or deficits cause changes in the money supply.
also considered which government policy "tool" should be used on which policy "target.
showed, contrary to what many economists before him had believed, that when exchange rates are fixed, monetary policy should be used to ensure equilibrium in the balance of payments (also known as the "external balance"), and fiscal policy should be used to adjust aggregate demand to attain full employment ("internal balance").
In thinking through all these issues of assigning tools to targets and of fixed versus floating exchange rates, Mundell
pointed out the so-called incompatible trinity: (i) unregulated mobility of capital, (ii) a particular fixed exchange rate, and (iii) a particular price level.
showed that, at most, only two of these can be achieved.
This has become standard thinking among economists and policymakers.
It means that a government that wants, say, to keep inflation low and allow free capital movement must settle for a floating exchange rate, which is what most governments now do most of the time.
Mundell's other big idea in the 1960s involves optimum currency areas.
Rather than take it as given that each country should have its own currency, Mundell
noted that if states within countries all shared the same currency, more than one country could do the same.
Again, this seemed like a theoretical curiosum at the time (1961), but as the history of the euro has shown, it is anything but.
cited the reduction in transactions costs for trade across borders and the related ease of knowing various prices as the major advantages of a currency area (see monetary union).
The major disadvantage, he
noted, is the difficulty of maintaining full employment when one country suffers from some event that other members of the currency area do not suffer from.
What if, for example, Canada and the United States are in a currency area, but the demand for softwood lumber suddenly declines?
This would hurt Canada proportionally much more than the United States and, with a floating exchange rate, Canada could let the value of the Canadian dollar fall and save somewhat on the need for Canadian lumber workers' wages to fall.
But with Canada and the United States in the same currency area-the ultimate in fixed exchange rates-the Canadian dollar cannot fall relative to the U.S. dollar because they are the same dollar.
One immediate implication, noted Mundell, is that high labor mobility (i.e., allowing workers to move from one country in the currency area to another country in the area) is key so that workers can have an easier time finding jobs.
Of course, the euro is now the world's largest currency area, and, in line with Mundell's thinking, many EU supporters are advocating that workers be free to move from one EU country to another.
Opposition to such worker mobility, though, was strong among French voters who voted down the EU constitution in 2005.
The issue of mobility of labor also dovetails with another issue to which Mundell
showed that if labor and capital are mobile across national borders, then even if there are trade barriers, labor and capital can shift to equalize prices of tradable goods.
This means that trade barriers lead to more movement of labor and capital.
was and is an ally of various supply siders who not only want to use fiscal policy to keep the economy growing-which is consistent with his
original 1960s insight-but also want a particular fiscal policy: namely, keeping marginal tax rates low or cutting them to a low level.
Nobel address,2 Mundell
highlighted the fact that inflation during the late 1960s and the 1970s had pushed people into higher and higher tax brackets, even when their real income had not increased.
In the early 1970s, Mundell
advocated that Canada's tax brackets be indexed to inflation so that inflation alone would not increase people's marginal tax rates, and the Canadian government adopted this policy.
Mundell earned his Ph.D. from MIT in 1956.
early positions were at Stanford University, the Johns Hopkins Bologna Center of Advanced International Studies, and the International Monetary Fund
From 1966 to 1971, he was a professor of economics at the University of Chicago.
He has been on the faculty of Columbia University since 1974.
Polyconomics - Jude Wanniski - Biography
In this capacity, Wanniski met economists Robert Mundell and Arthur Laffer.
On Wanniski`s passing, his
mentor, colleague and friend Robert A. Mundell
, 1999 Nobel Laureate in economics, observed, "It is a great loss."