When I was in graduate school, Rudi Dornbusch was one of four macroeconomists who had bet their reputation on a theory-based prediction of what the future would hold, and had been right. Milton Friedman and Ned Phelps had bet that the low unemployment-low inflation prosperity of the 1960s was ephemeral, and they were right. Bob Shiller had bet that stock market indices would follow not a random walk but instead exhibit substantial mean reversion in the long run, and subsequent events have proved him right. Rudi Dornbusch had bet--back in the 1970s--that floating exchange rates would turn out to be extraordinarily volatile animals, and he turned out to be right.
Not only was he a brilliant thinker with a deep well of knowledge about the world and a tremendous concern for how to make the world a better place, but whenever we graduate student types saw Rudi, it was immediately apparent to us just how much fun he was having being an economist.
udiger Dornbusch, an economist at the Massachusetts Institute of Technology whose explanation of why currency exchange rates sometimes fluctuate sharply became a tenet of international economics, died on Thursday at his home in Washington. He was 60 and also had a home in Boston.
The cause was cancer, M.I.T. said in a statement.
Dr. Dornbusch, who spent 27 years as an M.I.T. professor, found himself frequently in the headlines for his outspoken views on various crises in developing countries. He was almost alone in predicting the Mexican peso crisis of 1994, just weeks before the peso collapsed. And he urged the Argentines to keep their peso pegged one to one to the dollar, reiterating that view on the eve of the devaluation last December and Argentina's plunge into debt default and crisis.
"Rudi believed strongly that Argentina needed a strong currency peg to maintain the confidence" of the markets, said Stanley Fischer, a Citigroup executive and a former M.I.T. colleague who as the deputy managing director of the International Monetary Fund in the 1990's often worked with Dr. Dornbusch.
Only in that way would the Argentines defeat inflation and draw the foreign investment needed for economic growth. "Rudi would say that if the Argentines only had the discipline to maintain the peg," Mr. Fischer explained, "then we would all be better off."
Dr. Dornbusch encouraged developing countries to embrace policies that maintained the confidence of capital markets. That often meant inflation-fighting austerity policies that required budget cutting and higher interest rates. He gave his advice on frequent trips abroad as a consultant, many to Latin America. Very often, the finance ministers and Central Bank presidents with whom he met had been his students at M.I.T.
"On my first trip to Chile," recounted Paul Joskow, an M.I.T. economist, "I went to the ministry of finance to meet with the minister and the deputy minister, and behind the deputy's desk were two photos — one of Chile's president and the other of Rudi."
A seminal paper that Dr. Dornbusch published in 1976, a year after he joined the M.I.T. faculty, solved a puzzle. Floating currencies should adjust gradually to one another, economists thought. The volatility that was often a feature of foreign exchange trading seemed irrational. How else to explain why currencies overshot their value on the high and low side?
But Dr. Dornbusch argued that the overshooting was a rational response to economic shocks and news. Currencies can respond instantly in daily exchange trading, while a country's employment levels, inflation rate and economic growth adjust only slowly. But once these others do adjust, the pressure comes off the currency, which then returns to normal value. That insight into the dynamics of exchange rates became widely accepted.
Dr. Dornbusch was also the co-author, with Mr. Fischer, of "Macroeconomics" (McGraw-Hill, 1981), the first textbook for undergraduates in advanced economics courses to include chapters on the shifts in economic theory that had gained prominence over the previous decade or so.
He was born in Krefeld, Germany, on June 8, 1942, and studied economics at the University of Geneva, getting his undergraduate degree in 1966. Heeding the advice of a mentor that he should move to the United States to advance his career, he enrolled at the University of Chicago, where he earned his Ph.D. in economics in 1971.
After teaching stints at Chicago and the University of Rochester, he went to M.I.T., recruited by the university to fill a slot as an international economist. Despite his illness, he had taught in the spring semester and had traveled to Geneva in early June to receive an award and take part in a panel discussion.
Dr. Dornbusch is survived by his wife, Sandra Masur, and a brother, Paul Josef Dornbusch of Krefeld. Posted by DeLong at July 28, 2002 02:10 PM