The death of Rudi Dornbusch on July 25, at the age of 60, took from us a great economist and an exceptional human being.
Rudi was born and grew up in Krefeld, Germany. He was an undergraduate at the University of Geneva, and completed his Ph.D. at the University of Chicago in 1971. He was a student of Robert Mundell, and both the subject matter--the development of the Mundell-Fleming model--and the elegant style and insights of his early work reflected Mundell's influence. He taught at the University of Rochester and at the University of Chicago before accepting an offer from MIT in 1975.
In 1976, soon after coming to MIT, Rudi wrote his most famous and influential theoretical article, "Expectations and Exchange Rate Dynamics". Exchange rate fluctuations following the shift to flexible exchange rates in 1973 were surprisingly large--far greater than fluctuations in domestic prices--and the question was why. Rudi provided a simple explanation. The price level and the level of output are "sticky", and thus change only slowly. When a shock hits the economy, it is absorbed initially by interest rates and the exchange rate. But gradually the impact of the shock is transferred to output and domestic prices, and the exchange rate moves towards its new equilibrium level. The Dornbusch result is that in this process the exchange rate typically overshoots its long run value--and because it overshoots, the exchange rate fluctuates more than the price level.
As Ken Rogoff, chief economist at the IMF, (and a former student) said in delivering a celebratory lecture on the 25th anniversary of its publication, "The `overshooting' paper marks the birth of modern international macroeconomics"
From the late 1970s, Rudi became increasingly interested in policy issues. Within a decade, he had become one of the outstanding policy economists of our time. In his policy work he displayed the same rare talent as he had in his theoretical work, of being able to extract the essence of a complicated problem and explain it in terms that made it seem simple...