José Manuel Suárez Mier*
One of the most influential thinkers has just died. He made notable theoretical contributions while influencing the economic policy applied like few others: the creation of the euro and the European monetary union; the economic boom in the Reagan era; and the transformation of the Chinese economy to the peak it is today.
I met Bob at the University of Chicago, where he was one of the international economics stars. Although I did not take classes with him, I attended his great course in macroeconomic general equilibrium, which I confess required a level of mathematics that I, recently arrived from the UNAM, lacked.
As one of his brightest students, Rudy Dornbush, wrote, “Mundell’s influential work came up with models and concepts that quickly became the Volkswagens of analysis for open economies because they were easy to handle, reliable, and attractively designed.”
Mundell studied and took advantage of the experience of his native Canada, a small (economically) and open country, to emphasize the enormous implications of international capital mobility for conducting stabilization policies in countries with floating or fixed exchange rates.
One of his most notable contributions is the “principle of effective market classification,” based on Jan Tinbergen’s finding that an autonomous instrument is required for each independent economic policy objective, and they also had to be matched in such a way that they were more effective.
He proved that monetary policy should focus on making prices stable and fiscal policy on achieving the highest economic and employment growth compatible with price stability, which influenced prioritizing central banks to become independent.
In addition to integrating asset markets and capital mobility in open economies, he revived the concept of incorporating the monetary realm into the balance of payments analysis, following the pioneering work of another great University of Chicago economist, Lloyd Metzler, and its links to money creation, deficit financing, external imbalance, interdependence, and inflation.
Mundell’s analytical models were essential to better understand the new financial world in the face of the collapse of the system created at Bretton Woods, when in 1971 the US cut the gold-dollar nexus, which was already the international reserve currency, and put an end to the fixed parities that prevailed until then.
Studying the economic behavior of the different regions of Canada, Mundell developed the idea that there should be “optimal monetary areas” that should have the same currency, which does not necessarily imply that the countries that exist today are, since their regions may be uneven in their economies.
I would require several more articles to begin to do justice to his many rich contributions to economics and to solving enormous economic problems afflicting the world, which I shall endeavor to do soon.
*Consultant in economics and strategy in Washington DC and professor at universities in Mexico and the US. Email: aquelarre.economico@gmail.com
This column is also published in Spanish on April 8, 2021, in the Excélsior newspaper, based in México City.