By any yardstick but particularly by the standards of American economists�Galbraith
is 94, Kindleberger and Friedman are 90, Samuelson is 87, Modigliani
is 85, Klein is 82 and Arrow is 81, to name just a few�Dornbusch died
at a very young age of 60.

Dornbusch is a very familiar name to all students of economics. Macroeconomics
co-authored by him and Stanley Fischer has been an authoritative textbook
for a quarter of a century. His other claim to fame rests on an article
that he wrote in 1976.

The early seventies saw world moving away from fixed to floating exchange
rates. But contrary to what most economists believed in and hoped for,
this shift was being accompanied by great volatility.

In his still-acclaimed masterpiece �Expectations and Exchange Rate Dynamics�,
Dornbusch showed that such turbulence in exchange rates was a perfectly
�rational� response to shocks in monetary policy. This paper has passed
into history as Dornbusch�s �overshooting� model.

Dornbusch�s policy focus was on South America. In the 1980s and 1990s,
countries of this region had finance ministers and central bank governors
who had studied at Chicago, Berkeley, MIT and Harvard.

Some of them had been Dornbusch�s students. The region is in a mess
today largely because of politics, the transition from military rule
to democracy notwithstanding. It is sobering to note that rarely in
human history has so much academic brilliance produced such great and
continuing real-world devastation, calling into question the nature
of the economic therapy itself.

In his defence, it must be recalled that in a widely-quoted article
published early that year, Dornbusch had anticipated the December 1994
Mexican peso crisis.

This was to be later called �the first financial crisis of the twenty-first
century�. In fact, the 1994 edition of Dornbusch and Fischer had an
unusual �box� in which the authors wondered how long the 8 per cent
of GDP current account deficit and the 40 per cent inflation-adjusted
appreciation of the Mexican peso could be sustained.

Dornbusch wrote extensively on Brazil. On Argentina, his view remained
controversial. When many were advocating an abandonment of the 1:1 peso:dollar
peg, he continued to back the idea of the �currency board� that tied
the expansion of domestic money supply to an increase in dollar reserves.

This system did kill hyperinflation that ravaged Argentina in the 1980s.
But very soon, in economics as in life, what is a solution at one point
of time becomes part of the problem.

One of Dornbusch�s very last pieces in March 2002 called for a radical
solution along the lines of what the League of Nations imposed on Austria
following World War I � an abandonment of Argentina�s monetary, fiscal,
regulatory and asset management sovereignty for five years in exchange
for new loans from abroad.

Dornbusch�s only visit to India was in April 1992 when the nation was
in the very early months of its economic reforms. He stressed the need
for low inflation, exchange rate stability and credibility of economic
institutions.

His remarks were timely. India was to be racked by double-digit inflation
in 1993-94 and 1994-95, caused largely by hefty increases in procurement
prices for rice and wheat. This was also the period when the country
was making the transition to market-determined exchange rates.

As it turned out, our subsequent performance in both these areas has
been commendable. Inflation is low mainly because of an open economy.
The currency is stable barring occasional blips when there is a demand-supply
mismatch in dollars.

Depressed economic growth itself since 1996-97 has helped. The real
challenge is to dampen inflationary expectations and maintain currency
confidence when the economy is expanding vigourously.