Currencies and Crises.

• Author: Ho Li, Jane-yu

This is Krugman's second book of collected essays. He describes this volume as having more immediate real-world relevance than the first one, Rethinking International Trade, in the sense that he has attempted to decipher the rapidly changing world of international monetary matters. He admits that this effort is sometimes made at the expense of intellectual coherence. Despite that concern, he manages to maintain the reader's interest in and enthusiasm about his subject matter with various styles of his writing.

In Krugman's theoretical papers, he keeps his analytical models small and insightful. He makes an admirable attempt to link his theoretical work to the empirical evidence. As usual, he challenges some prevailing thinking. Krugman also debunks some conceptions popular in policy debates. Among other things, he points out the lack of a theoretical foundation in most of policy packages proposed to solve the Third World debt problem. Perhaps his most useful service is his articulation of the criteria and processes used to design models. In so doing, he shows a thorough understanding of the value and limitations of theoretical economic models. Economic theories are ultimately useful only if they can increase our understanding of real world by making sense of its intricacies. Without serving this purpose, theories can only be helpful in training students' ability to make logical deductions, while leaving real world problems unsolved. Consequently, real world problems would be resolved either by policy prescribed without much theoretical foundation or prescribed solely from ideological commitment. Neither solution would be desirable. Krugman's eleven essays cover four key areas: the role of exchange rate in balance-of-trade adjustment policy, the role of speculation in the functioning of exchange rate regimes, the Third World debt and proposed solutions, and the construction of an international monetary system. Because economists were often surprised by some international monetary developments and market responses to policies in the past two decades, Krugman believes economists' understanding of international monetary economics is inadequate. Therefore, his papers are aimed at improving the situation.

The first part of Krugman's book contains three chapters. The rise and fall of the U.S. dollar in the 1980s reactivated the debate about the role of exchange rates in helping adjust a country's balance of payments. According to Krugman, several...