Speech at the Robert Mundell Memorial

Martín Uribe 

November 11, 2022

St. Paul Chapel, Columbia University

It is a pleasure to be here to celebrate the life and towering academic contributions of Bob Mundell. 

In the United States, Mundell's work has been highly influential. In the rest of the world, his work is absolutely essential. I would like to explain, especially for those who are not trained in economics, why his work has been embraced by academics and policy makers all over the world.

The main question that informs much of Mundell's work is how the government can use monetary and fiscal policy (cuts in the interest rate or cuts in taxes, for example) to stimulate economic activity. The type of country that was the subject of Mundell's analysis was pretty much like the average economy in the world, which differs from the United States in that it is highly open to international trade in goods and financial assets. 

Being a large and diversified market, the United States is a relatively closed economy. For example, if you take the ratio of imports to GDP, a typical measure of openness, in the United States it has been historically around 10 percent. By contrast, In Canada, Bob Mundell's birthplace, it is 25 percent. In the UK it is 50 percent, and in Hong-Kong it is more than 100 percent. 

Before the work of Bob Mundell, the most commonly  used model to understand how monetary and fiscal policy can spur economic activity was a model called the IS-LM model. A problem with this model is that it captures a closed economy, that is, an economy that does not trade with other economies. This is an OK simplification if we want to use the model to understand monetary and fiscal policy in the United States, because, as I mentioned, the United States is a relatively closed economy. But this simplification is not very good for modeling the typical economy around the world, which is highly open to international trade. So what Bob Mundell did was to fix this problem. He expanded the IS-LM model to include an international module. So now the model includes variables like the current account  (the difference between exports and imports of goods, services, and rents) and the exchange rate. 

If Mundell's model had delivered the same predictions as the IS-LM model,  it would not have been adopted so widely around the world. But his model turned out to put the results of the IS-LM model upside down.  For example, Mundell's model predicts that under a floating exchange rate regime, that is, when the government doesn't intervene in the exchange rate market, fiscal policy is powerless in stimulating economic activity. This is a revolutionary   deviation from the IS-LM model, in which fiscal policy is a key instrument for economic stabilization. If, by contrast, the exchange rate regime is a fixed exchange rate, then fiscal policy is super powerful in bringingabout full employment, in the sense that it is  even more effective than in the IS-LM model. The same happens with monetary policy. It can be  powerless or super powerful depending on the exchange rate regime. 
 In any case, the predictions of Mundell's model are radically different from that of the model most commonly used before his work. Academics and policy makers adopted this new framework immediately, because it spoke more realistically to the economic problems  they were facing.

A second reason why Bob Mundell's work was so widely adopted  for macroeconomic policy evaluation and teaching around the world is its simplicity. Let me give one example. Mundell won the Nobel Prize for two contributions  he wrote in the early 1960s. One of these papers, in which he introduces the model I just described,  was published in the Canadian Journal of Economics in 1963. In this paper, Mundell creates a graphical apparatus to explain the effects of monetary and fiscal policy in his model. This graphical approach is so disarmingly simple that it was adopted verbatim by college level  textbooks in intermediate macroeconomics. I cannot emphasize enough how exceptional it is 
 that a Nobel Prize winning contribution is written in its original form in a manner similar to that in which we teach college students. What this meant is that one did not need a Ph.D. degree from a top university to learn Mundell's  contributions. College students all over the world could learn exactly what Mundell had in mind. 

In closing, I summarize by saying that Bob Mundell's work  was embraced widely around the world because it made fundamental progress in practical macroeconomic problems  with extraordinary simplicity. 

Thank you very much.