Elements of Financial Risk Management is highly flexible. It should appear on the syllabus of any Ph.D. course emphasizing variancemodeling and risk management. Graduate students will welcome its intuitive presentation as they attempt to work their way throughmore technical original literature. At the same time, the book can serve as the basis for a variety of elective courses at the master's andadvanced undergraduate levels. Its coverage is broad, including material on non-Gaussian distributional models, copulas, credit riskmanagement and stress testing, in addition to a comprehensive survey of parametric and nonparametric volatilitymodeling techniques.

Since its initial publication in 2003, Elements of Financial Risk Management has enjoyed something of a monopoly position inthe market for risk management texts suitable for courses at the master's level. Given this favorable position, one might expect asecond edition to include only perfunctory updates. Yet Christoffersen's 2e provides significantly expanded coverage, informed byboth recent academic research and the financial crisis. The revision includes several entirely new chapters, covering topics such asrealized volatility, credit risk management, and the term structure of risk.

Let me conclude bluntly: Elements of Financial Risk Management is one of the best textbooks in financial econometrics, ratingalongside classics such as Campbell, Lo and MacKinlay.1 Scholars working in the field owe a particular debt to Christoffersen, whoillustrates that risk measurement and risk management are not technical arcana, but rather broadly accessible topics of greatpractical importance.

Bradley S. PayeDepartment of Banking & Finance, Terry College of Business, University of Georgia, United States

E-mail address: bpaye@uga.edu.

1 Campbell, JY, Lo AW, MacKinlay CA. 1997. The econometrics of financial markets, Princeton, NJ: Princeton University Press.

doi:10.1016/j.iref.2012.06.002

Review of “From optimal tax theory to tax policy: Retrospective and prospective views” by Robin Boadway. MIT Press(2012).

Researchers in optimal tax theory frequently hear the challenge—what good is optimal tax theory for actual governmentpolicy on taxes? This question comes from other economists, tax researchers in accounting and law, and scholars in publicpolicy. Robin Boadway opens his Munich Lectures book with a quote from Vito Tanzi, longtime director of fiscal affairs at theInternational Monetary Fund, describing optimal tax theory as a “highly unproductive activity.” If Tanzi's challenge played evena small part in goading Professor Boadway to write this book or in determining its content, Tanzi's provocative remark was“highly productive”!

Boadway begins with a careful discussion of past contributions of theory to tax policy (mostly predating the optimal taxrevolution) and discusses many issues that make it hard to bring tight theory to policy. From this explanation of the difficulty of thetask, he then makes it look easy with a first-class Cook's Tour of the forty years of research contributions and their policy relevance.The next chapter is an excellent summary of recent research contributions. These topics include public goods and the Samuelson rulewith distortionary taxes, quantity and price controls (including work requirements and minimum wages), and tagging (basing taxschedules on personal characteristics that have a correlation with earning ability). Many of the papers in this literature are not easyreads—Boadway provides both intuitive and technical descriptions of these results in ways that are easy to grasp quickly. For thenonspecialist, it is an excellent introduction to a large literature. For the specialist, it is an excellent resource on the mainachievements. For the graduate student studying for a comprehensive exam, it provides a lifeline in what can seem an overwhelmingtask. Boadway concludes with a discussion responding to many of the challenges he discussed earlier. He covers what has alreadybeen done and lays out many fruitful lines of research for the future.

Economists may not have an equivalent of the Hippocratic Oath (“first, do no harm”), but Boadway does not hesitate to point outsome common misconceptions that have been derived from optimal tax theory. After a careful explanation of the productionefficiency theorem and some limitations, he considers its misuse in international policy prescriptions in favor of the destination basisfor VAT and the residence basis for capital income taxation. In a similar vein, he discusses the weaknesses of arguments for or againstcapital income taxation on efficiency grounds.

The consensus of the economics profession hasmoved a longway from the Haig/Simons/Pechman comprehensive tax base as theideal for personal taxation. Many economists today support the principle of consumption taxation, although there is less agreementon the reasons for their support. I findmyself a bit disappointed that Boadway does not offer more support for consumption taxation.A system based on the EET principle (in which contributions to retirement savings are exempt from income tax, the annual returns tocapital are also exempt, and withdrawals for retirement consumption are taxable) has much to recommend it. It is relatively simple,meshes well with cash-flow taxation for business (or a consumption-based VAT); and offers horizontal equity across workers withand without employer-funded pensions. The American tax system offers a choice between EET and TEE (contributions are after-taxand both annual returns and withdrawals are exempt) in IRAs which is either bewildering or an invitation to clever tax arbitrage.

452 Book reviews

Boadway spends only a little time on political constraints, but amove from the 1980s tax system to EET (or at least closer to it) mighthave been feasible politically. Instead, we have a systemwithmany special treatments for capital income, each strongly defended bysome interest group. However, a fair treatment of this issue would have taken him a long way from his mission of considering thecontributions of optimal tax theory for policy.

What's missing? He does not discuss optimal taxation in the presence of oligopoly pricing. He also leaves aside issues of fiscalfederalism, even though this is an areawhere tagging has a potential role. Perhaps the next generation of graduate students should behappy Boadway left a few important issues unexplored.

If youwant to get caught up on recent developments in optimal taxation, Robin Boadway has removed all excuses that it would betoo burdensome. In 242 pages, he spells it out clearly and carefully.

Jonathan H. HamiltonDepartment of Economics, Warrington College of Business Administration, University of Florida, Gainesville, FL 32611, USA

E-mail address: Hamilton@ufl.edu.

doi:10.1016/j.iref.2012.06.003

Modeling monetary economies, 3rd edition, by Bruce Champ, Scott Freeman, and Joseph Haslag

Reviewed by Edgar A. Ghossoub, Department of Economics, University of Texas at San Antonio.“Modeling monetary economies,” provides advanced undergraduate students with an excellent exposition to monetary

theory. The book is very deep, yet easy and very pleasant to read. I recommend this text to any undergraduate studentconsidering a graduate degree in economics as it provides a solid stepping stone to more advanced topics in macroeconomicsand monetary theory.

From a pedagogical perspective, the book has a number of interesting features, including very thoughtful problem sets andinteresting summary at the end of each chapter. However, the most important feature is that the authors use one simpleframework, the overlapping generations model to address an array of important issues in monetary economics. Specifically, thebook uses Samuelson's (1958) model as a benchmark and builds upon it by introducing different frictions such as transactionscosts, information asymmetries, and liquidity risk to rationalize a role for money and financial intermediaries in the economy.More importantly, the text highlights the importance of these frictions for monetary policy without getting into too muchtechnical jargon. Additional technical extensions are added in at set of appendices at the end of each chapter.

The book is divided into three parts that focus mainly on the steady-state (long-run) behavior of the economy. In part one;the authors model the different functions ofmoney. The discussion begins by studying the role ofmoney as a store of value. Next,the role of money as a medium of exchange overcoming the double coincidence of wants problem is examined. The authors alsodemonstrate how commodity money is inefficient compared to fiat money. In a setting where money is the only store of value,the welfare implications of inflationary financing are examined. In particular, a positive rate of money creation reduces thereturn to money balances, which discourages money holding (savings) and hinders the lifetime income and the utility of futuregenerations. Moreover, positive inflation acts as a tax on the old generation that relies on money to consume. Therefore, aconstant money stock is optimal.

In part two, the primary focus is on money, banking, and capital formation. Specifically, the authors demonstrate how in theabsence of frictions, money and other assets such as physical capital are perfect substitutes. Therefore, they both are held inequilibrium up to the point where they yield the same rate of return. In such an environment, a higher rate of money creationlowers the return to money and diverts resources toward capital investment, which stimulates capital formation. This is thestandard Tobin (1965) logic.

The analysis is extended into a setting initially developed by Freeman (1985), where money provides a liquidity advantageover physical capital. In this setting, money can be dominated in rate of return and still be held along with physical capital as bothassets are no longer perfect substitutes. Analogously, the role of banks in creating inside money and providing liquidity services(for instance insuring agents against liquidity risk) is thoroughly examined. The authors also discuss different policy options bythe monetary authority, which they link to the 2007 financial crisis.

Finally, in part three, the authors study the interaction between monetary policy and government debt. The primary topicsdiscussed here include, the crowding out effect, open market operations, and debt monetization. In analyzing the governmentbudget constraint and the feasibility of different financing policies in chapter 14, the text focuses primarily on the case where thereal interest rate exceeds the growth rate of the economy. However, as pointed out by the authors, the data indicates the oppositehas been taking place since the mid‐1980s. This issue merits some discussion in future editions of the book as violatingthe assumption can have significant implications for the conclusions derived. For instance, in a simple environment where thegovernment rolls over its debt and relies on seigniorage revenue, the government becomes a net creditor or a deflation is requiredwhen the real interest on government debt is below the rate of economic growth.

453Book reviews