Mundell calls for a closer monetary union as step toward single world currency

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Robert Mundell, the 1999 Nobel prize winner for economics and a former IMF staff member, reiterated his advocacy of a "group of three" monetary union, comprising the United States, the euro area, and Japan, with the stabilizing influence of a common monetary policy.

Mundell's lecture, on the theme of "The International Monetary System: Quo Vadis?" was delivered at the IMF as a memorial in honor of Manuel Guitián, the former Director of the IMF Monetary and Exchange Affairs Department, on the first anniversary of his death. His remarks were preceded by tributes to Guitián by IMF Managing Director Horst Köhler (see box); First Deputy Managing Director Stanley Fischer; Guillermo Ortiz, Governor of the Bank of Mexico; Joaquim Muns, Professor of Economics at the University of Barcelona; and Joaquin Ferran, former Director of the IMF's Office in Europe. The speakers were introduced by Mohsin S. Khan, Director of the IMF Institute, who also coordinated the lecture.

In his remarks,Mundell called for "a new way of looking at the world," based on country size measured in monetary terms: "You've got the dollar area, which is the dominant figure, and then the euro area and the yen area, and then much smaller economies." The United States, he said, had a GDP of about $10 trillion; the euro area about $7 trillion; and Japan about $5 trillion. Further down the list were countries like China and the United Kingdom, with some $1.5 trillion each. "So the big countries represent 60 percent of the world economy," he noted. If you talk about international financial architecture, he stressed, you have to be talking about the group of three and the exchange rate relationships among the group.

Expanding on his theme in a wide-ranging review, Mundell said that such a monetary union would in time serve as a prelude to the establishment of a single international currency. Five prerequisites for monetary union, in his view, are a common index of inflation, a common target for inflation, an exchange rate "fixed forever," a common monetary policy, and the redistribution of seigniorage so that no one gains from the change.

"So you could do all that, and I think it would be a better economic system for these three currency areas and for the world, he said. "What a blessing it would be if Asia didn't have to worry about these...