The Switch of Research Focus
Having completed his two major books on protection and trade policy and a manuscript on customs union theory which he decided was not original enough to be published, Corden made what he calls his ‘Big Switch' in the mid-1970s away from trade theory to focus most of his future research in the field of open-economy macroeconomics.
He did not abandon the field of trade theory entirely, continuing for more than two decades to publish occasional articles and one major survey (see below). But he sought a new challenge and the switch was undoubtedly influenced by the major shocks which hit the world economy in the early 1970s: the collapse of the Bretton Woods fixed exchange rate regime in 1971 which ushered in a new era of floating rates, the surge in world oil prices in 1973 and the partly resultant higher inflation rates in Organisation for Economic Co-operation and Development (OECD) countries.In his first real venture into this new field, Corden (1972a) tackled the issue of European monetary integration. The Werner Report in 1970 pushed for the completion of economic and monetary union in the then European Economic Community within a decade. Corden's essay analyses the theoretical issues which would need to be addressed as part of a European monetary union. It highlights the costs of such a union for the participating countries, focusing on the means of achieving macroeconomic equilibrium that could be needed under such a regime. It considers the conditions under which a real exchange rate adjustment would deal with the internal balance problem. This would require sufficient flexibility in domestic prices and wages in order to ensure the necessary adjustments in the absence of either large offsetting fiscal transfers from other members of the union and/or sufficient labour and capital mobility to fulfil Mundell's (1961) condition for an optimum currency area.
The essay was both innovative and influential at the time.
But given the hindsight of what actually happened after the formation of the eurozone in 1999 and the major sovereign debt crisis of2009-2012 which almost brought it to its knees, it misses some crucial issues. Corden (2018) notes that it does not discuss the key issue of whether the formation of a monetary union would actually increase the probability of asymmetric shocks hitting the members. It also does not consider the so-called death loop problem when growing private debts are linked directly to sovereign debts via the banking system in the absence of a full banking union and a common sovereign debt mutualisation scheme. Nonetheless, the essay still contains useful policy insights as the euro celebrates its 20th anniversary with some of the basic design flaws that Corden identified still unresolved.[189]Corden's third Oxford book was his first in his new field. Besides European monetary integration, Inflation, Exchange Rates and the World Economy discusses balance-of-payments theories; inflation and exchange rates; and the international adjustments to the 1973 oil price shock. A particular focus throughout the book is on the role of the exchange rate as a policy instrument. The book proved to be very popular and went through three editions. The third edition was expanded to include a discussion of selected issues arising in a world with flexible exchange rates and capital mobility, namely the international transmission of shocks, the nature of the international macro-system that evolved after the collapse of the Bretton Woods system and the possibilities of macroeconomic policy coordination among OECD countries.
4.2