Nobel prize goes to europhile who predicted the single currency

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The Independent Online

THIS YEAR's Nobel prize in economics was awarded yesterday to Robert Mundell, a professor at Columbia University in New York, for his research on, among other things, monetary union and economic policy in a world of floating exchange rates.

THIS YEAR's Nobel prize in economics was awarded yesterday to Robert Mundell, a professor at Columbia University in New York, for his research on, among other things, monetary union and economic policy in a world of floating exchange rates.

The citation from the Royal Swedish Academy praised the Canadian-born economist's "almost prophetic" accuracy in predicting, in the 1960s, future developments in international monetary arrangements.

Not only did he foresee the breakdown of the post-war system of fixed exchange rates, he also looked further ahead to consider the ideal conditions for monetary union in a world of floating exchange rates and large capital flows. Indeed, he was the first europhile, 38 years ahead of the launch of the euro.

The prize has a reputation for favouring obscure economic theory, but Professor Mundell, currently in London, has a strong leaning towards practical policy questions. He gave his name to the Mundell-Fleming mode, the workhorse theory of international trade which spells out the conditions for effective use of monetary and fiscal policies.

Danny Quah, professor of economics at the London School of Economics, said: "Mundell's work pervades almost all thinking at the forefront of monetary and macro-economic policy-making."

The Nobel committee had been unable to contact the winner ahead of yesterday's announcement. Professor Mundell said: "I am very pleased and I was surprised - not totally surprised, but a little surprised."

He said he would use the $960,000 prize money to repair a villa in Italy he bought 30 years ago. Born in Canada in 1932, he has been a professor at Columbia University since 1974. It was in 1961 that Professor Mundell addressed the question of when it would make sense for nations to give up an independent monetary policy in favour of a common currency. His analysis still frames the debate about the pros and cons of the euro.

His article highlighted the advantages of lower transaction costs in trade, but he pointed out that a common currency could not deal with "asymmetric shocks" when one region within a currency union needed to reduce real wages. "Early on I came to the opinion that Europe was going to move toward closer integration, and monetary union would be a good thing," Professor Mundell said. Most recently he has urged candidate countries in eastern Europe to join the single currency before they join the EU.

The citation said: "Mundell's contributions serve as a superb reminder of the significance of basic research. At a given point in time academic achievements might appear esoteric; not long afterwards, however, they take on great practical importance."

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