Saturday, March 11, 2017

Money on the Move: The Revolution in International Finance Since 1980 by Robert Solomon Princeton University Press, Princeton, New Jersey, , xiii + 210 pp., $29.95 (cloth).

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As a Director of the Federal Reserve Board's International Finance Division, a staff economist on the U.S. Council of Economic Advisers, and then a Brookings Institution Scholar, Robert Solomon has been at the center of the debate on, and the implementation of, international monetary policies for four decades. Money on the Move is his lucid and highly engaging sequel to The International Monetary System, 1945-81 (New York: Harper & Row, 1977, rev. 1982).

Solomon's writing is both eminently accessible to the nontechnical reader and intellectually rigorous, making it fascinating reading for policymakers and economists as well. This volume, which offers perhaps the most readable overview of the international monetary system over the past two decades, avoids the flamboyance of other economics books aimed at a general audience, such as Paul Krugman's The Age of Diminished Expectations. Incorporating frequent references to the personalities involved in policymaking, illuminating anecdotes, the political background, and a rich bibliography of both technical and nontechnical references, Solomon brings international policy issues vividly to life without displaying any personal biases or sacrificing insights from economic theory. Indeed, he acknowledges that some predictions he had made in previous writings were incorrect.

The opening chapter, which discusses the strengthening of the U.S. dollar before the Plaza accord of 1985 and its subsequent decline, describes the economic background of the major industrial economies and changes in government and economic doctrine, focusing on the United States and the United Kingdom. Solomon's explanation of the rise of the dollar against the background of a widening current account deficit in the United States in the first half of the 1980s, in which he draws parallels to the recent depreciation of the euro, reminds the reader that understanding large exchange rate movements continues to be a challenge for both academic and policy economists.

Solomon next leads the reader carefully through the developing country debt crisis of the 1980s as it unfolded, providing a front-row seat to the various initiatives undertaken to deal with it. The chapter serves as a reminder of the long history of both perceived moral hazard (the encouragement of risky behavior by investors, who see measures such as insurance or government subsidies as guarantees that they can reap the benefits of their risky investments while being protected against any losses) and private sector involvement in dealing with developing country debt crises, and the longer-term impact policy initiatives had on the pattern of financial flows in the 1990s.

The perspective on European Economic and Monetary Union (EMU) is painstakingly constructed from the Marshall Plan up to the creation of the single European currency. Solomon reflects on the economic debate surrounding convergence as well as on the operations of central banks and the makeup of financial markets, which illustrate practical issues about policy implementation even in advanced economies. He also reflects on the long-term pressures on the euro and likely IMF relations with EMU members. This chapter is essential reading for those looking for a complete yet brief European monetary history.

The chapter on capital mobility in the 1990s examines the increase in capital flows across both industrial and developing country borders, as well as the proliferation of financial instruments and derivatives that have accompanied these flows. In a refreshing departure from some academic economists who treat the increasing complexity of financial markets and their interactions with macroeconomics with some degree of discomfort, Solomon embraces the two and weaves a cogent story about the implications of these developments on flows, exchange rates, and the emerging market crises of the 1990s.

Finally, Solomon muses on the future of the international monetary system and the IMF's role within it. By tying together the major developments of the past two decades and important policy conundrums that remain unresolved, he evaluates proposals that have been the subject of active debate, ranging from exchange rate arrangements to the Tobin tax (a proposed uniform tax that all countries would levy on all foreign exchange transactions with the aim of making short-term movements of "hot money" unprofitable). He concludes by considering the future of a monetary system that revolves around the three major currency areas of the dollar, the euro, and the yen. The book, engaging to the very end, is a highly recommended reference for all policy economists interested in international monetary and economic relations.

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