The pantheon of great 20th-century economists includes John Maynard Keynes, Friedrich Hayek, Joseph Schumpeter and Milton Friedman, among a few others. Less well known but as tall as any of those giants was Robert Mundell, who died on the weekend at age 88.
A Canadian by birth who settled at the University of Chicago and later Columbia, Mundell made his economics reputation as the foremost student of the international monetary system. He won the economics Nobel in 1999 for his work on “optimum currency areas” and the monetary theory of the balance of payments.
His work led him to advocate fixed exchange rates, famously disagreeing with Friedman, who favored a floating-rate system. The latter has dominated world monetary affairs since the collapse of Bretton Woods in 1971, but not for the better if frequent bouts of economic and financial instability are evidence.
Mundell’s work laid the foundation for the euro, which has become a remarkably resilient reserve currency as he predicted in a paper as early as 1969. Mundell argued that fixed rates anchored in price stability allow more efficient trade and capital flows, while rapidly fluctuating rates lead to economic dislocations or worse. He often called the euro-dollar rate the most important price in the world.
The euro is in bad odor these days with economists who say you cannot have a common currency without an underlying fiscal union. But Mundell himself believed that the euro would lead to such a union (see his writing nearby), in particular that the euro’s monetary discipline would reduce the ability of politicians to devalue their way out of borrowing and spending to excess. The eurozone’s problems today aren’t due to the euro but to the failure of politicians to implement the supply-side reforms necessary to prosper in a system of monetary restraint.
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