Review: [untitled] Author(s): A. J. Brown Source: The Economic Journal, Vol. 88, No. 349 (Mar., 1978), pp.

163-164 Published by: Blackwell Publishing for the Royal Economic Society Stable URL: http://www.jstor.org/stable/2232031 . Accessed: 14/07/2011 07:05
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similar reduction of goods to basic characteristics. Theil's utility function is additive in these characteristics. One has the feeling that duality arguments, unfortunately segregated to chapter 2, would have eased substantially the very technical presentation, here and elsewhere. Applications are pursued in chapter I 3. Under additive preferences, the decomposition of quantity log changes is particularly simple. In chapters I 5 and I6, different ways of carrying out these decompositions are applied to the model transformedinto additive characteristics. These two volumes are produced to North-Holland's usual high standards but are priced far below their usual prices. They represent coherent theorising and econometrics taken to their furthest limits in a narrowly defined area and will appeal to researchersin this area rather than to economistsin general.
JOHN MUELLBAUER

London Birkbeck College, Lectures International on Monetary Exchange Rates,and the WorldEconomy. Inflation, Economics. W. M. CORDEN. (Oxford: Clarendon Press: Oxford UniverBy sity Press, I 977. Pp. viii + i 6o. f 4.50.) Although this set of lectures deals with four separate topics, it presents a coherent discussionof some main features of the world economy, and controversy about it, in recent years. The first section lays the theoretical base. The absorption model of internal and external equilibrium, distinguishing only between tradeable and nontradeable goods or services, is briefly set out, with the conclusion that both switching and income-regulation are required to reconcile the two objectives; that with flexible factor prices switching happens automatically, whereas with rigid factor prices a switching policy is needed; and that with rigidity of real factor prices equilibrium may be unattainable. The relation between external deficit and the rate of monetary expansion is added, with the presumptionthat flexible change rates allow different rates of inflation, while fixed rates tend to pull them together. The implications with regard to the effects of fixed and flexible exchange rates on the world rate of inflation are then explored. Given that factor prices are as flexible or inflexible upward as downward, neither system may be presumed to be more inflationary than the other; nor is there anything inherently inflationary or deflationary about an intermediate system of reluctant exchange adjustments. It is the fact that money wages, in particular, are more that introduces a difference, and the author flexible upwards than dow-nwards neatly reconciles Haberler's doctrine that, in view of this, fixed rates are more inflationary, with that of Mundell and Laffer who award the doubtful distinction to flexible rates. The temptation to reserve currency countries to export their inflation is the other source of asymmetry explored here, and the analysis of the famous United States monetary expansion of the early I970's is particularly valuable in view of the role widely attributed to it as the source of the world6-2

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wide acceleration in rates of inflation. The author emphasises that it was private borrowing from the United States that first raised foreign holdings of dollars, and the fears for the dollar exchange rate that caused these dollars to be dumped into official reserves. The impact of the rise in petroleum prices on the world economy is next studied. Perhaps the reader is not reminded sufficiently of the extent to which the events of the early I970S were influenced by primary product prices other than those of petroleum, but what is said about oil can be applied to a wider range of products. The point is made strongly that, so far as the balance of payments between OPEC and the rest of the world was concerned, there was really little problem; the oil-producers' balances had nowhere to go except to non-OPEC countries. The payments problems arose between countries of the non-OPEC world, largely because of the very different policies that they pursued in the face of the deflationary impact of raised import prices. (The differences, incidentally, may well have been due more to different degrees of comprehension than the author allows for.) But, in retrospect, the whole episode has been less disruptive than was often feared; ProfessorCorden points out that, while exchange rates were blown apart, purchasing power parities were preserved to a remarkable extent; there was hardly any competitive depreciation in real terms, very little resortto trade restrictions,and the United States assumed nearly all the extra banking risksthat were called for. Finally, the prospects of monetary integration in Europe are examined in the light of the theory and recent experience already reviewed. The different and increased inflation rates of the early I970S destroyed any chance of integration in the near future, but the author asks whether the experience may not have strengthened the case for integration in the longer run by giving new weight to the "natural rate of unemployment" hypothesis, and so to a Friedmanian policy of steady growth in the money supply. But this line of thought is not followed through, and one may well ask, in turn, whether, even in a world of vertical Phillips curves, a common currency might not promote demands for uniformityof nominal wage-levels to an extent that could only be reconciled with differencesin national situations, and with national aspirationsto a share in the Community's prosperity, by restoring the switching device of variable exchange rates. Altogether, this book will be useful to students as a lucid introduction to a fruitful modern treatment of international equilibrium theory, and more widely as a stimulating analysis of the main disturbancesof the world economy in the early I970s.
A. J. BROWN

University Leeds of