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Among his major contributions are:
Mundell is best known in politics for his support of tax cuts and supply side economics; however, among economists it is his work on currency areas and international exchange rates which caused him to be awarded the Nobel Prize. Nevertheless, supply side economics featured prominently in his Nobel Prize speech.
In the 1960's Canada, which Mundell is a native of, floated its exchange - this caused Mundell to begin investigating the results of floating exchange rates, a phenomenon not widely seen since the 1930's "Stockholm School" successfully lobbied Sweden to leave the gold standard.
In 1962 he co-authored the Mundell-Fleming model of exchange rates, and noted that it was impossible to have both domestic autonomy, and price stability and free capital flows - that two, and only two, of these objectives could be met. The model is, in effect, an extension of the IS-LM model applied to currency rates.
According to Mundell's analysis:
His analysis led to his conclusion that it was a disagreement between Europe and the United States over the rate of inflation, partially to finance the Vietnam war, and that Bretton Woods disintegrated because of the undervaluing of gold and the consequent monetary discipline breakdown. There is a famous point/counter-point over this issue between Mundell and Milton FriedmanMilton Friedman (born July 31, 1912) is a U. economist, known primarily for his advocacy of laissez-faire capitalism. In 1976 he was awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. His book Free to Choose coauthored with h (See http://www.irpp.org/po/archive/may01/friedman.pdf Mundell-Friedman debate )
This work would later lead to the creation of the Euro, and his prediction that leaving the Bretton Woods system would lead to " stagflationStagflation is a term in macroeconomics used to describe a period of characteristic high inflation combined with economic stagnation, unemployment, or economic recession. Stagflation is thought to occur when there is an adverse shock (a sudden increase, s" so long as highly progressive income tax rates applied. In 1974 he advocated a drastic tax reduction and a flattening of income tax rates.
Mundell, though lionized by some conservatives, has many of his harshest critics from the right: he denies the need for a fixed gold based currency or currency board - though he often recommends this as a policy in hyper-inflationary environments - and he is both a fiscal and balance of payments deficit hawk. He is well known for stating that in a floating exchange rate system, expansion of the money supply can only come about through a positive balance of payments.