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Review: [untitled]

Author(s): A. J. BrownSource: The Economic Journal, Vol. 88, No. 349 (Mar., 1978), pp. 163-164Published by: Blackwell Publishing for the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2232031 .

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I978] CORDEN INFLATION AND WORLD ECONOMY I63similar reduction of goods to basic characteristics. Theil's utility function isadditive in these characteristics. One has the feeling that duality arguments,unfortunately segregated to chapter 2, would have eased substantially the verytechnical presentation, here and elsewhere. Applications are pursued inchapter I3. Under additive preferences, the decomposition of quantity logchanges is particularly simple. In chapters I5 and I6, different ways of carryingout these decompositions are applied to the model transformed nto additivecharacteristics.These two volumes are produced to North-Holland's usual high standardsbut are priced far below their usual prices. They representcoherent theorisingand econometrics taken to their furthest limits in a narrowlydefined area andwill appeal to researchers n this area rather than to economistsin general.

JOHN MUELLBAUERBirkbeckCollege,LondonInflation,ExchangeRates,and the WorldEconomy. ectures nInternational onetaryEconomics. y W. M. CORDEN. (Oxford: ClarendonPress: Oxford Univer-sity Press, I 977. Pp. viii + i6o. f 4.50.)Although this set of lectures deals with four separate topics, it presents a co-herent discussionof some main featuresof the world economy, and controversyabout it, in recent years.

The first section lays the theoretical base. The absorption model of internaland external equilibrium, distinguishing only between tradeable and non-tradeable goods or services, is briefly set out, with the conclusion that bothswitching and income-regulationare required to reconcile the two objectives;that with flexible factor prices switching happens automatically, whereas withrigid factor prices a switchingpolicyis needed; and that with rigidity of realfactor prices equilibrium may be unattainable. The relation between externaldeficit and the rate of monetary expansionis added, with the presumption thatflexible change rates allow differentrates of inflation, while fixed rates tend topull them together.The implications with regard to the effects of fixed and flexible exchangerates on the world rate of inflation are then explored. Given that factor pricesare as flexible or inflexible upward as downward, neither system may bepresumed to be more inflationary than the other; nor is there anything in-herently inflationaryor deflationaryabout an intermediate systemof reluctantexchange adjustments.It is the fact that money wages, in particular,are moreflexible upwardsthan dow-nwardshat introduces a difference, and the authorneatly reconcilesHaberler'sdoctrine that, in view of this, fixed rates are moreinflationary, with that of Mundell and Laffer who award the doubtful dis-tinction to flexible rates.The temptation to reservecurrency countries to export their inflation is theother source of asymmetry explored here, and the analysis of the famousUnited States monetary expansion of the early I970's is particularly valu-able in view of the role widely attributed to it as the source of the world-

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I64 THE ECONOMIC JOURNAL [MARCHwide acceleration in rates of inflation. The author emphasises that it wasprivate borrowing from the United States that first raised foreign holdings ofdollars, and the fears for the dollar exchange rate that caused these dollarsto be dumped into official reserves.

The impact of the rise in petroleum prices on the world economy is nextstudied. Perhaps the reader is not reminded sufficiently of the extent to whichthe events of the early I970S were influenced by primary product prices otherthan those of petroleum, but what is said about oil can be applied to a widerrange of products. The point is made strongly that, so far as the balance ofpayments between OPEC and the rest of the world was concerned, there wasreally little problem; the oil-producers' balances had nowhere to go exceptto non-OPEC countries. The payments problems arose between countries ofthe non-OPEC world, largely because of the very different policies that theypursued in the face of the deflationary impact of raised import prices. (Thedifferences, incidentally, may well have been due more to different degrees ofcomprehension than the author allows for.) But, in retrospect, the wholeepisode has been less disruptivethan was often feared; ProfessorCorden pointsout that, while exchange rates were blown apart, purchasing power paritieswere preserved to a remarkable extent; there was hardly any competitivedepreciationin real terms,very little resortto trade restrictions,and the UnitedStates assumednearly all the extra banking risks that were called for.Finally, the prospects of monetary integration in Europe are examined inthe light of the theory and recent experience already reviewed. The differentand increased inflation rates of the early I970S destroyed any chance of in-tegration in the near future, but the author asks whether the experience maynot have strengthenedthe case for integration in the longer run by giving newweight to the "natural rate of unemployment" hypothesis, and so to a Fried-manian policy of steady growth in the money supply. But this line of thoughtis not followedthrough,and one may well ask,in turn, whether, even in a worldof vertical Phillips curves, a common currency might not promote demandsfor uniformityof nominal wage-levels to an extent that could only be reconciledwith differences n national situations,and with national aspirationsto a sharein the Community's prosperity, by restoring the switching device of variableexchange rates.Altogether, this book will be useful to students as a lucid introduction to afruitful modern treatment of international equilibrium theory, and morewidely as a stimulating analysisof the main disturbancesof the world economyin the early I970s. A. J. BROWNUniversity f Leeds