Meeting of minds

Academic economists and policymakers do not always make the best friends. The former are preoccupied with the building of mathematical and econometric models to explain and test hypotheses relating to the complexities surrounding economic behaviour; they rarely have the pleasure of seeing their writings make an impact in the real world. The latter, usually operating in an uncertain economic environment, have to implement economic policies in the knowledge that they may affect the wellbeing of society as a whole or of particular groups and individuals; they will be judged by the real outcome of their actions (or inactions).

Bridging this difference is important. Any effort to inform policymaking by presenting the evolution of academic thinking on a subject and to enrich the academic literature with examples from the "economic battlefield" is to be welcomed. This book does exactly these things for the interrelated issues of international financial crises and financial architecture, two very topical subjects in economics.

In the first part of the book, the authors present a concise but rigorous treatment of the main economic models, explaining and predicting financial crises. Consistent with the literature, the initial focus is on explanations relating to the effects of macroeconomic variables ("fundamentals-based models") and the effects of investors' self-fulfilling expectations that are unrelated to fundamentals ("sunspot-based models").

But the authors do not just round up the usual suspects. They present recent developments in the literature of global games (which reconcile the previous two views), thereby allowing the analysis to encompass fresh thinking on the subject.

The second part of the book turns to the issue of international financial architecture with an emphasis on private-sector participation in crisis resolution. The discussion concentrates on the proposals for sovereign debt bankruptcy reform, and the main issues are presented with clarity. The analysis concludes with perhaps the most interesting chapter, on why emerging economies cannot borrow long-term in their own currency, a fact that restricts their ability to manage their balance sheet better.

The main characteristic of the book is that the technical nature of the presented theories is not sacrificed to the altar of delivering a text that would be more accessible to the non-expert readership. This characteristic is an advantage, as the mathematical treatment and diagrammatic exposition of the featured models provide a convincing, succinct and elegant analysis.

Even though the book cannot cover everything, contributions from the recent literature on exchange rate regimes could have been included, and the concluding remarks could have been more extensive and less neutral.

Judged against their own objective, which is "to provide the basic analytical tools that will allow a reader to navigate their way through the burgeoning academic and policy literature on the international financial architecture", the authors do an excellent job. The book will appeal to anyone interested in the serious study of financial crises and the design of international financial mechanisms.

Alex Mandilaras is lecturer in economics, Surrey University.