Robert Mundell, RIP
By Scott Sumner
Robert Mundell recently passed away at the age of 88. Mundell was one of the most important macroeconomists of the past 100 years, and his work greatly influenced my own research. While he made important contributions in many areas of international trade and macro theory, here I’ll focus on one aspect of his work.
There are three basic approaches to monetary economics. The most famous is the rental cost of money approach, which focuses on the interest rate as a policy instrument and also as an indicator of the stance of policy. This approach was developed by Knut Wicksell and extended by Keynes. The second is the quantity of money approach, which was developed by David Hume, among others, and extended by Milton Friedman. In this approach, monetary policy is all about changes in the quantity of money, which today is controlled by the central bank. Then there is the price of money approach, based on work by Gustav Cassel, Irving Fisher, and others. This focuses on the price of money in terms of some other asset, such as gold or foreign exchange. Robert Mundell is the most important proponent of this approach.
Mundell’s work became the basis for the supply side view of monetary policy, and also influenced much of the “New Monetary Economics” of the early 1980s. I was also heavily influenced by this research, particularly in my work on targeting the price of CPI or NGDP futures contracts. And my book on the role of gold in the Great Depression is also quite Mundellian in spirit.
While I sometimes disagreed with Mundell’s specific policy views, particularly regarding the euro (which he favored), there is no doubt that he was a brilliant economist and that his many important contributions to trade and macro will influence future generations. He will be missed.
PS. One of my biggest regrets is that I never got a chance to meet Mundell, or to visit his lovely home in Siena, Italy.