Mundell vs Friedman on exchange rates

I came across this debate on random surfing on Bob Mundell, the 1999 Nobel laureate who got the same for his work on exchange rates. His most famous work is what we call today as impossible trinity (see my few posts on this here and here)

This is a debate between 2 economics stalwarts and was done sometime in May 2001. It may be old but is very relevant even today and is a pleasure to read. However, to understand the nuances fully, one has to be on his toes and is a not a light read as I thought it would be.

They begin with basics of exchange rates (Mundell is for fixed, Friedman for flexible), then discuss Euro (Mundell lauds the success, Friedman sceptical about its success). They share their views on Bretton Woods, Gold Standard, and finally on World Currency. It is an excellent primer on so many topics.

Both have many differences on the topics. But there is a similarity as well. Yes, both are from Univ of Chicago :-)Friedman was  always in Chicago and Mundell has done majority of his research in Chicago.

Rudi Dornbusch has written a nice write-up in middle (page 11-14 of PDF) on the University:

Every so often there was a gladiator event, a workshop where for some reason faculty from different areas got together and got at each other. Mundell vs. Friedman were special events. Friedman obviously admired the sheer creativity of Mundell but would not let him get by, sparks would fly. Mundell  recognized Friedman as an icon but understood that he could play the bad boy with success. I remember the unspeakable from Mundell: “Milton, the trouble with you is you lack common sense”.  

2 Responses to “Mundell vs Friedman on exchange rates”

  1. Morrison Bonpasse Says:

    Since the May 2001 publication of that Mundell/Friedman debate, the 12-nation eurozone was fully born – with euros in the hands of Europeans. Soon the European Monetary Union will grow to 15 countries, with at least 7 more European Union members more to come later.
    The success of the euro has shown the world the value of modern monetary unions and the world should move as soon as possible to a Single Global Currency managed by a Global Central Bank within a Global Monetary Union. See http://www.singleglobalcurrency.org.
    The benefits of a single global currency are listed below:
    * Annual foreign exchange transaction costs of $400 billion will be eliminated.
    * Worldwide asset values will increase by about $36 trillion.
    * Worldwide GDP will increase by about $9 trillion.
    * Global currency imbalances will be eliminated.
    * All balance of payments problems will be eliminated.
    * Currency crises will be prevented.
    * Currency speculation will be eliminated.
    * Currency fluctuations and the need for hedging will be eliminated.
    * Worldwide interest rates will be reduced due to the elimination of currency risk.
    * Worldwide inflation will be reduced as currency exchange rates will no longer be a cause.
    * The need for foreign exchange reserves, now over $4 trillion, will be eliminated, and these funds can be used for more productive purposes than maintaining an inefficient foreign exchange system.
    The people of the 192 U.N. members now need only 146 currencies to transact all their business, including the payment of taxes. By next January the number of currencies will drop to 144 with the movement of Cyprus and Malta to the euro. Why not plan and research now for an accelerated movement to a single global currency?
    How to get there from here? It can be through a combination of processes: ization (whether euroization or dollarization) and the expansion and creation of monetary unions. Also, the IMF or Bank for International Settlements could establish an international “central” reserve bank for countries that wish to have a stable currency based on an aggregate of current international currencies. At some point in this transition, there should be convened a number of international monetary conferences, as was done in 1944 at Bretton Woods, N.H., to firmly establish the global monetary union. It’s common sense to move toward common cents.

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