International Monetary Arrangements for the 21st Century.

Dowd, Kevin

The basic thesis of this book is that current and anticipated future developments in the world economy will increasingly undermine ability of governments to prevent exchange rate movements from exceeding prespecified limits. These developments include the increasing integration of the world economy, increased capital mobility, and the "increasingly politicized environment in which monetary policy is made" which "will erode the credibility of governments' commitment to the pursuit of robust monetary rules" [pp. 56]. If this analysis is correct, it effectively rules out the sustainability of pegged but adjustable exchange rate regimes, crawling peg regimes, target rate regimes and other currently popular options. Indeed, if we regard even ostensibly "fixed" rate regimes as in reality pegged but adjustable, Eichengreen's argument also rules out the option of conventional "fixed" rate regimes as well. Only two options then remain: genuinely floating rates, with no commitments to exchange rate targets of any kind, and full monetary union.

The book is part of a series of 22 books being released as part of the Brookings project on integrating national economies. The book itself is organized into 9 chapters. Leaving aside the introduction (chapter one), chapter two looks at policy options, chapter three at prerequisites for international monetary stability, chapter four at historical evidence, and chapter five, which is essentially the core chapter, at current and likely developments in the world economy, and also at options for monetary reform. Chapter six looks at optimum currency issues, chapter seven at prospects in Europe, paying particularly attention to the recent history of the ERM, and chapter eight at prospects and options for the rest of the world. There is then a brief concluding chapter, followed by comments by Alberto Giovannini and Toyoo Gyohten.

The book is to be recommended to anyone interested in international monetary arrangements. It has a thoughtful, clear and reasonable perspective of an important area that, frankly, confuses many other writers. Indeed, its basic perspective is probably its strongest point - and a very useful contribution to the literature. The book is also nicely written, and the main point - the critique of exchange rate targets - is in my view largely persuasive. (As an aside, I also like the Brookings format of having a couple of independent readers give their views at the end: it helps to give the reader the benefit of other expert opinions.)

Perhaps the most vulnerable spot in Eichengreen's analysis concerns political credibility, and I am not entirely convinced that Eichengreen gets to the bottom of this issue. He suggests that governments will find it increasingly difficult to make credible monetary or exchange rate commitments. He may be right, but what does this imply? One implication suggested by Eichengreen is that currency boards (or, by implication, independent central banks) might not be the panacea they are sometimes claimed to be by their proponents. His argument is that making the currency board or central bank independent of the government has limited credibility if the relevant parliament can subsequently change the law and alter the exchange rate. I agree, but not everyone would agree that this makes a currency board a non-starter, and therefore forces one to choose between flexible exchange rates and full monetary union. Nor would everyone necessarily agree with Eichengreen's implied conclusion that a full monetary union is free of this problem. It clearly is not: It may be more difficult to dissolve a full monetary union than to change an exchange rate, but governments can and have dissolved such unions in the past, a good example being the dissolution of the Austro-Hungarian monetary union after the break up of the Austro-Hungarian empire. I would therefore draw three conclusions: First, that Eichengreen is skating on thin ice when he suggests in a fairly unqualified way that currency boards lack credibility, but monetary unions have it. Second, I would suggest that the key issue is appropriate institutional structure, rather than, say, the issue of currency board versus full monetary union, and we need to ask why certain institutional structures have more credibility than others. And thirdly, I would suggest that we think in terms of credibility being related to the construction of barriers against political interference: institutions are more credible, the tougher the barriers against subsequent political interference. Given the danger that even good institutions such as currency boards can be subverted by political interference, the real issue is essentially political or constitutional, and the solution has less to do with international monetary arrangements than domestic political (or constitutional) ones (i.e., the answer is political or constitutional, and we should be thinking in terms of reform to protect the monetary system against the state). Still, I hope that people will read Eichengreen's book and draw their own conclusions.

Kevin Dowd Sheffield Hallam University