JOURNAL OF COMPARATIVE ECONOMICS 24, 115–117 (1997)ARTICLE NO. JE961388

THOMAS D. WILLETT, RICHARD C. K. BURDEKIN, RICHARD J. SWEENEY, AND

CLAS WIHLBORG, Eds., Establishing Monetary Stability in Emerging MarketEconomies. Boulder, CO: Westview Press, 1995. ix / 269 pp., no index,$55.00.

One of the positive effects of the opening of the former socialist countrieshas been the increased opportunity for free intellectual exchange among aca-demics and policy-makers there and their Western counter-parts. One musttherefore welcome the publication of this collection of papers based on aseries of conferences that were designed to promote such a dialogue. Thevolume contains chapters dealing with the political–economic origins, andthe consequences, of the persistent high inflation suffered by most transitioneconomies; the design of central banking institutions in those countries, espe-cially Russia; and recent monetary developments in Russia and several othercountries of Eastern and Central Europe.

All the contributions are concise and very readable, and none is excessivelytechnical or specialized. Several among them stand out. The paper by Burde-kin, Salamun, and Willett on the costs of inflation and that by Banaian onoptimal seigniorage present results that are relevant to the determination ofpolicy targets not only in transition economies but also in developing andindustrialized countries, and they deserve a wide readership. The formerreports estimates of the relationship between inflation and output in a largenumber of countries using a procedure that separates short-run Phillips-curveeffects from secular influences and incorporates non-linearities, in particularthe diminishing marginal, but not total, cost of inflation as rates rise. Thelatter calculates the, in some sense, optimal rate of inflation, where allowanceis made for the negative effect of inflation on money demand and output onthe one hand, and for inefficiencies in the traditional taxation system on theother. The conclusion to be drawn from the two papers taken together is thateven countries that have succeeded in bringing down inflation to moderatelevels have an incentive to finish the job and achieve truly low inflation ratesof, say, below 5% per year.

Lewarne provides a good analysis of the structural and juridical featuresof the Central Bank of Russia that may make it more or less prone to pursueinflationary policies, and Banaian and Zhukov identify the various motives

0147-5967/97 $25.00Copyright q 1997 by Academic PressAll rights of reproduction in any form reserved.

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that underlay the often chaotic process whereby the ruble zone collapsed.Siklos and Abel make a case for the hypothesis that stabilization in Hungarywas associated with a form of money or credit crunch that was largely avoidedin Poland and Czechoslovakia, although the argument would be stronger ifdemand and supply effects were better distinguished and the role of confidencein the banking sector given more emphasis.

Several other papers contain insights and interesting suggestions butleave the reader somewhat unsatisfied. Often insufficient attention is paidto alternative hypotheses or to counterarguments. Arbetman and Kugler,for example, find a negative correlation between relative tax to GDPratios and inflation for a sample of Central European countries in thelate 1980’s. They interpret this result as indicating that governments thathave the political capacity to extract an unusually large share of resourcesare also more capable of containing inflation. Besides doubting the ro-bustness of the estimates—the experience of Yugoslavia seems to be anoutlier—one may ask whether the results are not fully compatible withthe familiar story whereby a decline in output and higher inflation areassociated with a fall in revenue, which in turn results in deficits thatmust be financed by inflationary means. The concept of political capacityas measured by fiscal policy does not seem to add very much to ourunderstanding of the process.

Likewise Anderson’s ‘‘parallel strategy’’ for financial sector reform inRussia is based on the view that institutions largely inherited from the Sovietera, notably the Central Bank of Russia, are neither able nor willing to reform,and that the Western model of a two-tier banking system may not be suitedto current Russian conditions. She therefore favors free banking and thepromotion of the use of foreign currencies. While this proposal has appeal,by her own lights, the Russian government should be unwilling and unableto relinquish its monopoly control of money creation, and the establishmentof the judicial apparatus needed to support a more decentralized system maybe more difficult than the creation of an effective central bank, as the recenthistory of the CBR seems to suggest.

This is one instance where the inevitable publication lag has allowed certaintrends or new phenomena to emerge that would have modified many of theresults presented here. The success of reform in some countries has gatheredmomentum, and a number of former laggards have begun to benefit fromstabilization policies. Since most of the papers in the volume seem to havebeen written in mid-1994, their timeliness has eroded. Several of the pieces areof rather transitory interest, while others suffer from being neither systematicenough to serve as surveys of particular topics, nor detailed and analyticenough to be of much value to the specialist.

Perhaps the greatest omission from the papers published here is of any

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adequate discussion of exchange rate policy, which is meant to be addressedin a forthcoming companion volume. Yet monetary and exchange rate policiesare not separable, certainly not when discussing stabilization in emergingmarket economies. Therefore the editors might have been wiser to combinethe stronger contributions from the two volumes in a single collection ofconsistently high quality.

DANIEL HARDYInternational Monetary FundWashington DC 20431

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