Robert A. Mundell, whose work four decades ago created the intellectual basis for what this year became the common European currency known as the euro, yesterday won the Nobel Prize for Economics.
The work of Mundell, a Canadian who teaches at Columbia University, has been most visibly translated into the real world in Europe, but his conclusions about the role of floating exchange rates in strengthening the hand of monetary authorities is now the accepted gospel of policymakers throughout the developed world.
Mundell "chose his problems with uncommon--almost prophetic--accuracy in terms of predicting the future development of international monetary arrangements and capital markets," said the Royal Swedish Academy of Sciences in giving the prize to the 66-year-old economist. "At a given point in time academic achievements might appear rather esoteric; not long afterward, however, they may take on great practical importance."
Indeed, when Mundell entered his most productive period after receiving his doctorate from the Massachusetts Institute of Technology in 1956, exchange rates were fixed against one another almost everywhere in the world. Central banks adjusted interest rates to keep currencies at their agreed-upon levels against the currencies of other countries.
That system began to splinter in 1971, and today capital moves freely around much of the world seeking its highest return. "His work is relevant not just to central bankers in Frankfurt [where the European Central Bank is headquartered] but to every 23-year-old working in the financial markets that drive billions of dollars around the world," said Danny Quah, an economics professor at the London School of Economics.
Mundell, who was in London today as the award was announced, told the Associated Press: "It's a measure of the respect that colleagues around the world have for me, and I'm very pleased with that recognition."
When Mundell did his pioneering work on Europe 38 years ago, the then-named European Economic Community was a mere six countries, compared with the 15 of today's European Union, and even those six did not allow their currencies to float against one another.
"Early on I came to have the opinion that Europe was going to move toward closer integration, and monetary union would be a good thing for Europe," Mundell said yesterday.
It took several failed attempts, and even now only 11 of the EU's countries have switched to the common currency, the euro. But in its first 10 months of existence, the euro, while losing value against the dollar, has held together as a common currency.
The specific impetus for creating a single European currency when the subject was first broached in the 1970s was political as much as economic. German Chancellor Helmut Schmidt and French President Valery Giscard d'Estaing were tired of seeing fluctuating exchange rates whipsaw the massive trade flows between their two countries.
But Mundell's work remains part of the daily dialogue in Europe. His concepts of an "optimum currency area"--one in which a single currency makes more sense than several--comes up often in political and media discussions about the euro. In his 1961 article "A Theory of Common Currency Areas," Mundell noted several advantages from adopting a single currency, such as lower transaction costs in trade. But he also highlighted potential disadvantages, such as the likelihood that workers would have to move from one region to another to find jobs as the economy of one region contracts.
In fact, some European economies are growing quickly; Ireland has an annual growth rate of about 8 percent. Others, such as Germany, are experiencing virtually no growth. The question of whether enough Germans will move to Ireland to restore equilibrium remains open.
C. Fred Bergsten, director of the Institute for International Economics, said Mundell is the first Nobel laureate whose work has focused mainly on international economics.
"It's a reflection that we are in a globalized world," Bergsten said.
The academy also took note of Mundell's work showing that monetary and budgetary policy can work independently.
Mundell, who was born in Canada in 1932, did his undergraduate work at the University of British Columbia and the University of Washington, then did postgraduate studies at the London School of Economics. After receiving his MIT doctorate in 1956, Mundell worked at the University of Chicago and then taught at Stanford and Johns Hopkins universities. He was a senior economist in the research department of the International Monetary Fund from 1961 to 1963. He joined Columbia in 1974.
ROBERT A MUNDELL
Born: Kingston, Ontario
Education: B.A., University of British Columbia, 1953; PhD, MIT, 1956; also studied at the London School of Economics.
Career highlights: Has taught at Stanford University, the Johns Hopkins Bologna Center of Advanced International Studies, the University of Chicago and at the Graduate Institute of International Studies in Geneva; joined the staff of the International Monetary Fund in 1961; since 1974 has been a professor of economics at Columbia University.
Books include: "Monetary Theory: Interest, Inflation and Growth in the World Economy" (1971); "Debts, Deficits and Economic Performance" (1991); "Building the New Europe" (1992).
Has been an adviser to: United Nations, IMF, World Bank, European Commission, among others.
SOURCES: Contemporary Authors; Columbia University