Monetary Dynamics and the Mundell-Fleming Priority Question: Evidence from the Adaptations in

35 We have been unable to verify independently the contents of this letter.

36 Dornbusch [2000, 202] claims that MD is the first of Mundell’s models in a Keynesian mode, despite the fact that it assumes full employment, a characteristic that Mundell notes makes it different from subsequent papers, notably, Kyklos, CJEPS61, IMFSP, and CMP.

37 The focus of the Nobel Background article (Persson [2000]) on the famous “overshooting” paper (Dornbusch [1976]) is only one example suggesting that Dornbusch had enormous input into the Nobel Committee’s formulation of its thinking concerning the awarding of the prize.

38 This sort of complaint seems to be a valid characterization of the way in which Mundell saw MD. Afterall, MD admits that its analysis “..offers a simplified exposition…and provides preliminary answers…” {1960, 228] It has “limitations” [1960, 230]. The adaptation of this footnote in International Economics notes that the model “…sidesteps many of the complications and unresolved difficulties…final verification of the theoretical results must await the creation of a complete and exact model.” [1968c, 154]

39 Nonetheless, Mundell claims that the conclusions of CMP do not vitiate the results of MD (Mundell [1963e, 482]).

40 The modest sentiments expressed in the adapted footnote in the International Economics (154) are an order of magnitude more politic than the sniping comments which earlier versions of the other papers had directed towards MD. Nonetheless the tone of this footnote is consistent with Mundell’s thinking at the time (Mundell and Swoboda [1969, 262]), that the analysis in MD had “…created a lot of trouble…by using…a definition…that he no longer liked or accepted.” Clearly he felt that CMP presented a far superior approach. But since so many other of his macro papers were infected with this unacceptable definition of monetary policy (CJEPS61, IMFSP, and BNL) this statement amounts to a wholesale repudiation of work which nonetheless was incorporated into International Economics.

41 In a very real sense, the adaptations which appear in International Economics are less integrated than are the original papers. This would be contrary to Mundell’s declared intention in the Preface to the book (Mundell [1968a, v])

42 This is especially the case since the papers appear in International Economics in an order that bears little resemblance to their chronological order of publication.

43 The reader should be skeptical of this claim. The purpose of Kyklos, CJEPS61, CMP, and CJEPS64 is to analyze shocks which affect the long-run equilibrium of the economy. The explicit argument in the last three papers is that the exchange rate regime that is being pursued has a crucial effect on the nature of the equilibrium at which the economy settles, not just on the dynamical path by which it attains that equilibrium. We take this issue up again in section VIII.

44 Mundell ([2001, 218]) has stated that he first wrote out the equations for the open-economy macromodel with capital mobility in the summer of 1958 when working for the Stewart Commission. We now have copies of the two contributions to this commission which are attributed to Mundell ([1958a], [1958b]). These contributions do not incorporate capital mobility mechanisms at all, nor do they deal with Canada’s macroeconomic situation. Although the Nobel Committee includes, as its very first (chronologically) entry in Mundell’s bibliography, the three volumes of the Stewart Commission’s final report, under the rubric Contributing Author, in fact, very few of the chapters in that work are attributed to specific individuals and none to Mundell.

It is further claimed that this research, after some modifications while the author was a Ford(???) Visiting Professor at Stanford University, was submitted for publication in 1959 to the Economic Journal. The submission was rejected. We have been unable to verify this account independently, since we have not managed to obtain a copy of this submission.

45 The gist of this sentence is that the Nobel Committee ostensibly gave the prize to Mundell for the wrong reason. In claiming that the full-employment model describes today’s world better than the variable output models, Mundell is essentially repudiating the model which the Committee considered his most important contribution.

46 There is a mention in a footnote that Meade’s comparative static approach can be replicated in MD (Mundell [1960, 242]) but there is no attempt to do so in that paper. Further, Mundell chides Meade for conflating analysis of the displacement of the equilibrium of the model with questions of “…the ‘process’ or ‘ease’ of adjustment in dynamic terms.”

47 Boyer and Young [2005] have noted that immediately after CJEPS64, Mundell reverted to the zero capital mobility view, which is employed consistently in his subsequent formal research program. In particular, every chapter in Mundell [1971] assumes that capital is immobile, as does the core contribution to the debate about whether Europe meets the criteria of an “optimum currency area.” That paper is entitled, “Uncommon arguments for common currencies.” Johnson and Swoboda [1973, ].

48 Wonnacott [1965, 87] attributes this surge in exports to “non-price factors” among which, presumably, would be the commencement of the Korean War hostilities.

49 Indeed, most discussions of this period focus on the excitements involved with the argument between the Government and the Governor of the Bank of Canada. Important events in this episode include his acquittal at trial by the Senate, his resignation immediately thereafter, and the movement of policy, ten months later, back to a fixed exchange rate regime.

50 Wonnacott [1965, 219] points out that on the fiscal front, too, there was a good deal of confusion concerning Ottawa’s policies. He remarks that “…the large deficits were not primarily a result of conscious counter-cyclical fiscal policy.”

51 Coyne had recommended, in a confidential memorandum to the Minister of Finance, that tariff surcharges be imposed by the Government of Canada (Wonnacott [1965, 330]). This sort of thinking was the inspiration for IMFSP61, as footnote 2 (509) makes clear.

52 Contrary to what Mundell asserts in MD and in his recollections quoted immediately above, Mundell [1964b, 85] takes the view that the high unemployment which Canada experienced at that time was due exclusively to monetary policy. The argument is that the policy which the Bank of Canada pursued “…suggests a faulty understanding of how the advantages of a flexible exchange system can be exploited…An expansive monetary policy from 1959 to the present could have avoided much of the unemployment excesses which Canada has experienced in the recent past.”

53 Our analysis of the model in MD has been unable to confirm that the nominal exchange rate actually stays at one particular value when the interest rate adjusts according to the rule which the model sets for its fixed exchange rate version. As we have noted above, all nominal values seem to be indeterminate in this model. It is therefore quite a stretch for Mundell to claim that his MD model anticipates the way in which this debate is framed in modern terms: a comparison between fixed exchange rates and inflation targeting. (Mundell [2001, 220])

54 It seems to us that unless agents’ net position in domestic-currency denominated market instruments is zero, the equivalence that Mundell sees between these two responses is not valid.

55 The relevant footnote in the original publication is less sanguine about the applicability of this theorizing to operations actually undertaken by central banks. It states that: “This [procedure] often has no practical institutional counterpart in the real world, so the central bank may not be completely successful in its stabilization policy; the abscissa [along which is measured the terms of trade] must then be taken to reflect changes in the price level and the exchange rate.” (Mundell [1960, 236]).

56 See Tsiang [1975] for a skeptical view of whether this Principle has applicability even within the simple settings where it was first exposited at any length.

57 Mundell [1999, 4] writes of the BNL paper “For some reason I didn’t include this…article in my book…” In both this letter and the chapter in the Arnon and Young volume, the title of the paper is cited correctly (Mundell [2002, 5]) In contrast, in the inaugural Mundell-Fleming Lecture (Mundell [2001, 219, 227]) the title is listed as “The Nature of Policy Choice” in both the body of the text and in the references.

58 A citation to MD within this section of the original of BNL [1963d, 265] is elided from the adaptation, although most of the sentence where it occurs remains intact.

59 Boyer and Young [2005] provides extensive analysis of the timing of the writing of, and the adaptations which were made to, Barter Theory.

60 Furthermore, in the model in this paper the only market instrument held by domestic residents is domestic money. Therefore the exchange rate pegging mechanism that the central bank is employing must amount to setting the domestic-currency price of imports. This makes the model quite a different framework from what we find in all the other papers from this period, which typically assume that the degree of capital mobility is greater than zero.

61 Dornbusch [1976a] introduced the term “Mundell-Fleming model” into the published literature with fourteen mentions of the hyphenated names. If one accepts the restrictions on the model which appear in that paper, then the Mundell-Fleming canon would include a very small subset of what is now generally recognized as falling within that rubric. Nonetheless, since the flexible exchange rate, perfect capital mobility case is found in both Fleming [1962] and CMP those papers would continue to be included. In contrast, since MD does not allow such a setting, there is a further reason, along the lines of arguments which we make below, to exclude MD from being part of the Mundell-Fleming canon.

62 No textbook of which we are aware includes MD as part of the Mundell-Fleming canon. Ironically some textbooks (Abel et al. [2003, 366] and Williamson [2004, 462]) cite CJEPS61 as the only Mundell contribution, despite the fact that that source does not include any of the ineffectiveness results which are the distinctive feature of this model..

63 Mundell [2001, 219] admits that there are “…two strains to my models.” The argument that immediately follows this statement, that these models should be viewed as a monolithic structure, seems a bit far-fetched.

64 This is the conclusion at which the classic textbook by Obstfeld and Rogoff [1996, xxi] arrives.

65 This is the claim in Mundell [2001, 225].