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The impetus for the conference that was the basis for this volume emanated from the influence of two brilliant minds-Egon Sohmen and Adam Klug, who both died at an early age, leaving their families and the professions of economics and economic history with major voids. In the course of research on the origins of Open Economy Macroeconomics, the significant contributions of Egon Sohmen came to the fore. After correspondence with some of those involved in the early development of the Open Economy Macromodel, we turned to Adam Klug for his views on the matter-as he had dealt with the history of intertemporal trade models in his Ph. D. thesis. And it was Adam who suggested the idea of a conference bringing together economists and economic historians. At this point we want to acknowledge the very generous grant from the Egon Sohmen Foundation and the active participation of Dr. Helmut Sohmen and Mrs. Renee Sohmen at the conference. We also want to thank Prof. Sir Aaron Klug, Nobel Laureate, and the Klug family for their support and the financial contribution of the Adam Klug Memorial Lecture Fund at Ben Gurion University. Other institutions that contributed to the conference were the Gianni Foundation; Bank of Israel; University of North Carolina; Department of Economics, Faculty of Social Science and Aharon Meir Center for Banking, Bar Ilan University; Department of Economics and Faculty of Social Science, Ben-Gurion University of the Negev.



Notes on the Development of the International Macroeconomic Modell

Chapter 1. Notes on the Development of the International Macroeconomic Modell

It is a great pleasure for me to take part in this conference on “The Open Economy Macromodel: Past, Present and Future.” My comparative advantage today is unmistakably on the “past” component of the sub-title and I shall therefore speak somewhat autobiographically about my role in the development of this model and influences from predecessors and contemporaries and reserve for closing remarks some limitations of the model and opportunities for its use in the future.
Robert Mundell



Chapter 2. The Two Monetary Approaches to the Balance of Payments: Keynesian and Johnsonian

In the 1950s and 60s, a number of new approaches were developed with the aim of understanding better the sequences of economic events that could lead countries into balance of payments problems and the policy measures that could prevent or correct such problems. Two places in particular where these intellectual activities flourished were the Research Department of the International Monetary Fund and the Department of Economics of the University of Chicago. The London School of Economics should probably be mentioned in the same breath, in as much as Harry G. Johnson, with whose name these activities are inexorably linked, taught the new gospel in both places as a commuting professor.
Jaques J. Polak, Yakir Plessner

Chapter 3. Long-Term Fluctuations of Real Exchange Rates with Emphasis on those Caused by Inflation

It is well known that flexible exchange rates are mostly connected with discretionary monetary regimes. Commodity standards using the same commodity, for instance gold or silver, or a commodity basket as a base necessarily imply fixed exchange rates. Under such conditions these rates can only move in a very narrow range determined by transportation and insurance costs. In gold or silver standards the limits of this range are given by the upper or lower gold or silver points. If free markets in these commodities exist, the exchange rates will be maintained within this range by the arbitrage activities of private individuals.
Peter Bernholz, Nissan Liviatan

Chapter 4. Why White, Not Keynes? Inventing the Post-War International Monetary System

The design of the IMF and its role in today’s international monetary system are largely the product of wartime negotiations between the United States and the United Kingdom in the run-up to the Bretton Woods conference of 1944. The two lead negotiators, John Maynard Keynes for the British and Harry Dexter White for the Americans, each developed an independent plan for a multilateral institution that would promote stable finance and growing international trade and would help prevent a recurrence of the disastrous mistakes made after the first World War. Where the two plans differed, the final outcome was dominated by the White Plan, not that of Keynes.
James M. Boughton, D. E. Moggridge

Chapter 5. Struggling with the Impossible: Sterling, the Balance of Payments and British Economic Policy, 1949–72

Our purpose in this paper is to explore how endemic sterling crises and balance of payments weaknesses contributed to that developing debate about how to halt national economic decline, a key constituent of which was a process of exploration as to how to lessen the external constraint to high growth and employment. This necessarily entails a close study of Britain ’s balance of payments situation (one often misunderstood) and a review of current thinking about the key exchange rate policy episodes (a euphemism for crises) of the golden age (principally, devaluation in 1949, the radical ROBOT plan of 1951—2 to float sterling, the 1967 devaluation and the eventual decision to float in 1972). Our survey encompasses official thinking and that of the wider market for economic ideas. Given the binding nature of the external constraint, and that Britain was one of the world ’s largest and most open economies during this period, economists (both insiders and outsiders), officials and politicians should have been particularly receptive to new thinking in international and open economy macroeconomic theory and policy. This paper discusses why in practice such new ideas were largely tangential to the British policy debate and in the process reveals something about both Britain ’s political economy and the more general relationship between developments in economics and their diffusion into policy.
Roger Middleton, David Laidler

Chapter 6. The Adam Klug Memorial Lecture: Haberler Versus Nurkse: The Case for Floating Exchange Rates as an Alternative to Bretton Woods?

From the perspective of the late 1930s and 1940s, the dominant view was that the interwar experience was a financial disaster. This view is perfectly encapsulated in the League of Nations’ publication The Interwar Currency Experience, the bulk of which was written by Ragnar Nurkse, published in 1944 and in the League ’s parallel 1945 publication, Economic Stability in the Post-War World. It also was the view behind the Keynes and White plans for international monetary reform, which culminated in the Bretton Woods conference.
Michael D. Bordo, Harold James, Peter B. Kenen



Chapter 7. Optimum Currency Areas and Key Currencies

Forty years after Robert Mundell put forth his celebrated theory of optimum currency areas, the analytical consensus based on his celebrated 1961 paper has disintegrated. Part of the problem stems from a seeming contradiction in Robert Mundell’s own work. For offsetting asymmetrical macroeconomic shocks, his 1961 article leans toward making currency areas smaller and more homogeneous rather than larger and more heterogeneous. However, in a little-known article published in 1973, “Uncommon Arguments for Common Currencies”, Mundell argued that asset holding for international risk sharing is better served by a common currency spanning a wide area—within which countries or regions could be, and perhaps best be, quite different.
Ronald McKinnon, Peter B. Kenen

Chapter 8. Designing EU-US Atlantic Monetary Relations: The Impact of Exchange Rate Variability on Labor Markets on both Sides of the Atlantic

The Euro/dollar rate is one of the most closely watched exchange rates in the world, much as the DM/dollar rate was in the past. Its gyrations, which are at times difficult to understand on purely economic grounds, are often perceived to be politically costly. But why should politician s and economists care about exchange rate variability? The superficial answer has usually been that exchange rate variability discourages trade. Unfortunately, a large empirical literature on this issue has not been able to document a strong link between exchange rate variability and the volume of trade. However, we would argue the volume of trade is not an important variable in itself. From a normative point of view other variables, such as (un-) employment are much more important. In particular one would not consider undertaking concrete policy steps to reduce trans-Atlantic exchange rate variability if the result were only an increase in the volume of trade. However, if one could obtain a reduction in (un-) employment such a policy might become much more attractive.
Ansgar Belke, Daniel Gros, Leo Kaas, Joshua Aizenman

Chapter 9. The Open Economy Macromodel: Interactions between Theoretical Developments and Real-World Behavior

The development of the open-economy macro-model over the past half century can be viewed as a running, and still uncompleted, saga of the interaction between advances in economic theory and developments in the practitioners’ world where economic policies are formulated and international economic transactions take place. As Maurice Obstfeld, one of the major contributors to, as well as the leading synthesizer of these developments in macro-theory, notes: “Frequently, prominent international policy problems, even crises, provide the inspiration for new [theoretical] explanations ” (Obstfeld 2000b, 1).
Marina v. N. Whitman, M. June Flanders



Chapter 10. Asset Prices, the Real Exchange Rate, and Unemployment in a Small Open Economy: A Medium-Run Structuralist Perspective

The second half of the nineties saw a number of industrial economies experiencing a steady decline in the rate of unemployment and real exchange rate appreciation together with a stock market boom, brought about by anticipation of higher productivity fueling an increased future need for capital, unaccompanied by rising inflation (Phelps and Zoega, 2001). How well does the open-economy Keynesian model (Mundell, 1962, Mundell, 1963) explain this phenomenon? In the small open economy version of this model with a given external real rate of interest under freely fluctuating exchange rates and perfect international capital mobility, the stock market boom increases both investment and consumer spending, thus aggregate demand. The expanded demand, however, puts an upward pressure on the domestic interest rate, which leads to a massive inflow of capital and consequently a real exchange rate appreciation. The result is that export demand is fully crowded out so as to leave output and employment unchanged. In a large open economy, the increased aggregate demand pushes up the world interest rate so that the higher velocity of money pulls up domestic output and employment (above the natural level), creating inflationary pressures.
Hian Teck Hoon, Edmund S. Phelps, Elise Brezis

Chapter 11. Do We Need a Reform of the International Monetary Institutions After the Asian Crises? Some Preliminary Suggestions Using Constitutional Economics

After the Asian Crises, a new situation has arisen for possible intervention of international financial institutions — especially due to the severe criticisms by many economists, politicians and other public officials, in which they pointed out the ineffective or even counter-productive interventions of the IMF (regardless of whether such a criticism can be justified or not). In addition, many voices have been raised to the effect that the IMF should either be abolished, or be given more effective and powerful means in order to intervene in future difficulties.
Friedrich Schneider, Benjamin Bental

Chapter 12. The Architecture and Future of the International Monetary System

There is a great deal of dissatisfaction with the architecture and functioning of the present international monetary system and this gives rise to persistent calls for reforms. Although these are most insistent during periods of crisis, such as at the time of the collapse of the Bretton Woods System in the early 1970s, the foreign debt problem of LDCs in the early 1980s, and the financial crises in emerging markets during the second half of the 1990s, they are heard even during periods of relative tranquility in international financial markets such as now. Dissatisfaction with the functioning of the present international monetary system arises because of excessive volatility and misalignments of exchange rates as well as a result of its inability to prevent or quickly resolve international financial crises. Uncertainty also arises from the move toward monetary unification in the European Union and the creation of the Euro, which seems to be pushing the world toward a tri-polar monetary system based on the dollar, the Euro and the yen. The reforms demanded most consistently are for a move to a system in which exchange rates are more stable and less flexible and emerging market economies are less prone to disruptive financial crises.
Dominick Salvatore, Marina v. N. Whitman


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