shows that a relaxation of Multi-Fibre Accord quotas after WTOaccession led to rapid export growth in the affected categories. Thesepoints aside, my sense is that policy alone is not enough to explain thespecial case of China. Or put another way, do we think that anothercountry facing a similar reduction of tariffs and selectively relaxingrestrictive policies against entry would have attracted the same levelof investment and trade growth? Perhaps China is sui generis.

With ahandle onhowChina's trade grew, if lackinga similarly stronggrasp on why, we can turn to the question of who was affected.Presumably, China's export success reflects the ability to produce goodsthat are better or cheaper than competitors, which should meandroppingprices for importers and reducedmarket shares for competitornations. Chapter 6 (Broda and Weinstein) argues that import priceshave not dropped much for Japan, acquitting China of responsibility fordeflation there. Chapter 4 (Hanson and Robertson) calculate the degreeto which China's exports have depressed exports for other developingcountries, and conclude that the effect has been quite modest.

A similar leaning against received wisdom can be found through-out the volume. Exports play a smaller role than previously thought inaffecting Chinese domestic employment (Chapter 5, Feenstra andHong) and declining environmental quality (Chapter 11, Dean andLovely). Despite the importance of the US as a destination for Chineseexports, Chapter 13 (Branstetter and Foley) shows that US firms arenot particularly important as a source of FDI in China either in theaggregate or in the exporting sector, and that investment in China isnot displacing other investment by those firms. Despite concerns thatWTO accession would trigger a wave of anti-Chinese protectionism,anti-dumping cases against China have not been unusually high, norhas China been a common litigant before theWTO (Chapter 8, Bown).Finally, concerns that a reduction in Chinese agricultural protectionafter WTO accession would impoverish Chinese farmers also appearsoverblown (Chapter 10, Huang, Liu, Martin and Rozelle.)

Has conventional wisdom ever been so wrong on so many counts?Maybe this China thing isn't such a big deal after all. Or perhapsChina's export growth is a big deal, just not as extraordinary orcatastrophic as hyperbolic public accounts would have had us believe.A sober and data-driven accounting of actual trends, their causes andconsequences, has been overdue and is ably delivered by this volume.

Reference

Feenstra, R.C., Wei, S.-J., 2009. Introduction to “China's Growing Role in World Trade”.NBER Working Paper 14716.

David HummelsPurdue University, 100 S. Grant St, West Lafayette, IN 47907-2056,

United StatesTel.: +1 765 494 4495.

E-mail address: hummelsd@purdue.edu.

Challenges in central banking: The current institutional environmentand forces affecting monetary policy, Pierre L. Siklos, Martin T. Bohl,Mark E. Wohar, Cambridge University Press, 2010

Challenges in Central Banking is a bricolage of a book, covering awide range of issues relating to monetary and financial policy. Thevolume's eleven chapters grew out of papers that were originallypresented at a conference held in Budapest in 2007, a time of generalconsensus on best practices in central banking. Four propositions inparticular had emerged from this consensus: first, that granting

doi:10.1016/j.jinteco.2010.10.004

independence to central banks reduced inflation; second, that flexibleinflation targeting delivered optimal macroeconomic performance;third, that central banks should be as transparent as possible incommunicating their intentions to the public; and fourth, thatdelegating financial supervisory authority to an independent agencywould allow the central bank to pursue its monetary policy objectivesmore effectively. The worthy goal implicit in many of the paperscollected in the volume is to critically reexamine this conventionalwisdom.

These four consensus desiderata were overwhelmed by the 2007–2009 financial crisis, which presented central bankers with an entirelynew (or at least forgotten) set of challenges. These problems includedovercoming the zero lower bound on nominal interest rates,determining the efficacy and implementation of unconventionalpolicies, and the appropriate response of monetary policy to financialconditions. This volume's inconvenient timing means it was unable toaddress directly any of these problems. Its focus is instead on issues ofinstitutional design: incentive contracts, committee structure, inde-pendence, transparency, operating procedures, and the location of thesupervisory function. Recent events have pushedmany of these issuesto the background, but they remain important questions in the studyof central banking. The chapters collected in the volume, most ofwhich are surveys, provide an excellent compendium of currentthinking on these topics.

The book largely avoids issues relating to optimal design andperformance of monetary policy rules, a technical topic that has cometo dominate the recent literature on monetary policy. The soleexception is the opening chapter by Frank Smets, “Is the Time Ripe forPrice Level Path Stability in the New Keynesian Model?”, which takesup the important question of whether a price level target is preferableto the implicit or explicit inflation targets employed by most centralbanks. The argument for a price level target is familiar from Svensson(1999) and others. The logic is compelling: with forward-lookingexpectations, credibly targeting the price level generates countercy-clical inflation expectations, which in turn create stabilizing fluctua-tions in the real interest rate. Smets deftly recapitulates the rationale,using simulations of a New Keynesianmodel to illustrate and quantifythe policy's benefits. He then considers and then largely dismisses theobjections that uncertainty and lack of credibility render the policyunworkable, and comes down squarely in favor of targeting the pricelevel.

The volume contains two contributions that turned out to be quiteprescient in light of recent events. The first of these is “Analysis ofFinancial Stability,” by Charles A.E. Goodhart and Dimitri P. Tsomocos,which consists of two distinct and only tenuously related sections. Thefirst is a brief but rich historical perspective on central banks' role inpromotingfinancial stability, duties that encompass both lender of lastresort and prudential regulation functions. The second half sum-marizes a theoretical model of illiquidity and default developed by thesame two authors in a series of papers written in collaboration withPojanart Sunirand. The model, a descendant of Diamond and Dybvig(1983), purports to offer central bankers a framework for assessing theprobability of default during crises, although no exercise along thoselines is presented in the chapter. “National Banks in a MultinationalSystem,” by David Mayes and Geoffrey Wood, complements theGoodhart–Tsomocos paper with its discussion of the challenges facedby national central banks in coordinating international responses tofinancial crises. Their conclusion, which has been borne out by recentevents, is that while liquidity problems can be handled in thetraditional manner, the resolution of insolvent banks is far harder tohandle without the appropriate transnational institutions.

The chapter by Donato Masciandaro, Marc Qintyn and Michael W.Taylor, “Independence and Accountability in Supervision ComparingCentral Banks and Financial Authorities,” looks at the governance ofthe financial regulatory authority, a function that in recent years hasbeen spun off frommany central banks and delegated to independent

93Book reviews

agencies. The authors observe that financial supervisors choosingbetween forbearance and failure, face a time consistency problem—adilemma illustrated all too vividly during the recent financial crisis.The standard prescriptions of independence and accountability wouldpresumably mitigate this problem, just as in the case of monetarypolicy. The chapter's main undertaking is to quantify these attributesfor a group of 55 countries, and to assess empirically the impact ofvarious economic, institutional and political factors on independenceand accountability. The reduced-form empirical analysis producessome intriguing results, including the puzzling finding that removingfinancial supervision from the central bank does not enhancesupervisory independence, although accountability tends to increase.

Two chapters revisit the well-trod ground of central banktransparency and independence. Both provide excellent surveys ofthe relevant literature. “The Economic Impact of Central BankIndependence: A Survey,” by Carin van der Cruijsen and SylvesterC.W. Eijffinger is breathtakingly comprehensive—both in its recapit-ulation of the theoretical arguments for and against transparency,and in its summary of twenty years' worth of research the topic.Particularly impressive is the paper's tabular summary of 53theoretical and 47 empirical papers written on the topic in recentyears. Adopting a refreshingly skeptical point of view, “The ComplexRelationship Between Central Bank Independence and Inflation,” byBernd Hayo and Carsten Hefeker, critically surveys the vast literatureon central bank independence. The prevailing interpretation ofAlesina and Summers (1993), and its often-overlooked antecedentBade and Parkin (1988), is that granting independence leads to lowerinflation. Hayo and Hefeker question this presumption, arguing thatcentral bank independence is to a large extent endogenous.Independence and low inflation may jointly depend on the “inflationculture” and historical conditions; or, as argued by Posen (1993,1995), on the strength of the financial sector's opposition to inflation.

Two chapters are noteworthy for the wealth of institutionalinformation they contain. The first of these is Corinne Ho'scontribution, “Implementing Monetary Policy in the 2000s: OperatingProcedures in Asia and Beyond.” The chapter's overarching message isthat central banks should no longer be thought of as simplymanipulating the quantity of reserves in order to achieve the desiredovernight interest rate. Most central banks have discontinued the useof quantitative operational targets, and many (though not the U.S.Federal Reserve) have de-emphasized discretionary operations infavor of regular standing facilities. The chapter provides a valuabletabular summary of the main features of central banks' operatingprocedures, although its usefulness is somewhat limited by its focuson East Asian economies. In a similar spirit, Philipp Maier's chapter,“How Central Banks Take Decisions: An Analysis of Monetary PolicyMeetings,” contains an encyclopedic tabulation of the attributes of thepolicy committees of 43 central banks. Included in the tabulation aresuch features as the number of committee members, their back-grounds, how themeetings are organized, andwhomakes the interestrate proposal. While Maier does not attempt to grade or rank thebanks' decision-making processes, he does identify several featuresthat can affect the likely prevalence of problems free-riding,groupthink, and information cascades. On these criteria, Maier creditsthe Bank of England with the closest adherence to best practice.

The remaining pair of papers is a study in contrasts. Both deal withthe broad question of how to design a central bank to achieve lowinflation, but one paper takes a very narrow theoretical approach,

while the other is a broad, reduced-form econometric analysis. Thetheoretical perspective is supplied by Georgios E. Chortareas andStephen M. Miller in their chapter, “The Principal–Agent Approach toMonetary Policy Delegation,” which reviews the familiar Barro andGordon (1983) time inconsistency problem as it applies to monetarypolicy, and describes how incentive contracts can be used to solve theproblem. While attractive theoretically, no central bank has yetadopted a contract-based solution. One explanation is the institu-tional environment within which central banks operate is far richerthan the single selfish decision-maker model used in this approach;another is that the time inconsistency problem is simply not relevantfor most central banks. Pierre L. Siklos' concluding chapter, “Institu-tional Rules and the Conduct of Monetary Policy,” abandons the highlystylized principal–agent model, hypothesizing instead that inflation isdetermined by many aspects of good governance—not just centralbank autonomy—that collectively contribute to a sense of trust. Hesupports his view with an informal appeal to signaling theory, andwith a reduced-form regression of inflation performance on variousproxies for governance quality. The general conclusion is that many ofthese indicators do seem to matter, albeit in ways that are notimmediately apparent in a reduced-form regression framework.

While thin in terms of new theory and original empirical work, thiseclectic collection makes a valuable contribution with its surveys ofcentral bank transparency and independence, its discussion of financialstability, and its compilation of data on central banks' practices. It is aworthwhile addition to the bookshelf of any connoisseur of centralbanking.

References

Alesina, A., Summers, L.H., 1993. Central Bank independence and macroeconomicperformance: some comparative evidence. Journal of Money, Credit and Banking25, 151–162.

Bade, R. and M. Parkin, 1988, Central Bank Laws and Monetary Policy, unpublishedmanuscript, University of Western Ontario.

Barro, R.J., Gordon, D.B., 1983. A positive theory of monetary policy in a natural-ratemodel. Journal of Political Economy 91, 589–610.

Diamond, D.W., Dybvig, P.H., 1983. Bank runs, deposit insurance and liquidity. Journalof Political Economy 91, 401–419.

Posen, A.S., 1993.Why Central Bank independence does not cause low inflation: there isno institutional fix for politics. In: O'Brien, R. (Ed.), Finance and the InternationalEconomy 7. Oxford University Press, New York, NY.

Posen, A.S., 1995. Declarations are not enough: financial sector sources of Central Bankindependence. In: Bernanke, B.S., Rotemberg, J.J. (Eds.), NBER MacroeconomicsAnnual. The MIT Press, Cambridge, MA, pp. 253–274.

Svensson, L.E.O., 1999. Price-level targeting versus inflation targeting: a free lunch?Journal of Money, Credit and Banking 31, 277–295.

Kenneth N. KuttnerWilliams College, Department of Economics, 326 Schapiro Hall,24 Hopkins Hall Drive, Williamstown, MA 01267, United States

NBER, United StatesTel.: +1 413 597 2300; fax: +1 413 597 4045.

E-mail address: kenneth.n.kuttner@williams.edu.

doi:10.1016/j.jinteco.2010.10.003

94 Book reviews