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highly promising. At the institutional level, Ekelund,Hébert and Tollison are the most prominentexponents of using economic theory, in particularrent-seeking models, to explain the evolution ofmedieval church doctrine and practices, and twoof their highly original papers on purgatory andusury are included.

Overall, this is a valuable collection of papersthat demonstrates that both studies of religiousbehaviour and the impact of religion have longpreoccupied economists and, since the 1970s, areincreasingly entering the mainstream with a fertileresearch agenda. In terms of leading journals,for example, four articles are reprinted fromthe

Journal of Political Economy

, three from the

American Economic Review

, and two from the

Journal of Economic Perspectives

.Given space constraints, there are inevitably

gaps in coverage. For example, there exists quite alarge empirical literature on the consequences ofreligion for a wide range of socioeconomic variables,such as crime, health, wages and fertility, that isoverlooked. Nevertheless, these volumes provide auseful resource and it may not be too long beforea third volume is required to keep pace with theexplosion of research in the field.

I

an

S

mith

University of St Andrews

The New Monetary Policy: Implications andRelevance

, edited by Philip Arestis, MichelleBaddeley and John McCombie (Edward Elgar,Cheltenham UK; Northampton, MA, USA,2005), pp. 253.

This volume consists of a collection of paperspresented at a Conference held in 2004 to celebratethe inauguration of the Cambridge Centre forEconomics and Public Policy, Cambridge, UK.There are 14 papers, most of which deal with the‘New Consensus Monetary Policy’ (NCMP). Whatis meant by the NCMP has now been outlined indetail by Goodfriend (2007).

Although many of the issues covered by thepapers in this volume have been widely discussedsince this conference, there are several issues thatcentral bankers and academics will find of interest:especially given that the inflation targeting frameworknow faces its stiffest test, with several factorsdriving global price shocks to energy and food.

The papers by Charles Goodhart (formerly at theBank of England) and Charles Freedman (formerlyat the Bank of Canada) should be of particularinterest to central bankers.

Broadly speaking, the academic contributionsdraw attention to the risks associated with thedoctrine of neutral money and the overly narrowfocus of monetary policy on inflation targeting.The practitioners, Goodhart and Freedman, focusmore on the operational aspects of inflation targeting,outlining the process that led to the successfulimplementation of monetary policy under ‘con-strained discretion’. The remainder of this reviewwill trace these themes through some of thepapers and relate them to challenges currentlyfacing inflation targeting (IT) regimes.

Arestis and Sawyer open the volume with acritical assessment of the theoretical and empiricalproperties of the NCMP. The model underpinningthe NCMP is familiar from the literature andconsists of a ‘dynamic’ aggregate demand or ISequation, an interest rate rule of the Taylor-typeand the expectations augmented Phillips curve. Ofthe criticisms raised by Arestis and Sawyer, themore substantive is the continuing belief in theneutrality of money that underpins the NCMP.One of the consequences of this doctrine is thebelief that inflation targeting makes the bestpossible contribution to output stabilisation. Un-fortunately, there is no basis in economic theory forsuch a belief; uniqueness of equilibrium is alwaysa special case. Nevertheless, the European CentralBank seems to be the leading exponent of thatbelief, with all other macroeconomic objectivestreated as secondary to the inflation target. Manybelieve this to be a dangerous vision.

The academic authors, in particular, point to theobvious link between monetary policy and growthin the capital stock. How is it possible, severalask, for monetary policy to be neutral in the longrun, in a world where the central bank, a monopolist,sets the real rate of interest? The chapters byArestis and Sawyer, Arestis and Karakitsos, andAllington and McCombie highlight the difficultiesfor monetary policy that arise when attention isfocussed exclusively on IT. All these chapters dealwith aspects of asset-price inflation and how itshould be dealt with from an IT policy perspective.They all suggest that the neutral money beliefunderlying the theory of IT distorts the assessmentof this issue. In particular, regulation and stabilityof financial markets is an important part of mone-tary policy and needs another ‘instrument’ inaddition to the interest rate to tackle it. The recent

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surge of interest in financial markets regulationrecognises this fact but a theme of the papers inthis volume is that analysis of the issue is nothelped by the beliefs that money is neutral andthat financial markets are always efficient.

Turning to the practitioners, Goodhart is supportiveof the IT policy framework on the grounds that ithas provided a nominal anchor via a more trans-parent and effective policy framework. There issome merit to this view but doubts linger abouthow effective the framework will be in dealingwith future shocks. The point here is that the lowinflation outcome during the ‘great moderation’ ofthe 1990s was a global phenomenon unrelated toIT per se. Goodhart points out that the movementsin the Bank of England’s interest rate during thisperiod could account for only a fraction of theimproved inflation performance. Nevertheless, heattributes some of the additional improvement ininflation performance to superior monetary policyas a result of the increased effectiveness in‘anchoring’ expectations by announcing a credibleinflation target.

Freedman is largely in agreement with Goodhart’svision but from the perspective of the Bank ofCanada’s search for an effective operationalapproach to IT. Of particular importance here ishis explanation of the Bank of Canada’s use ofthe IT framework to deal with supply-priceshocks. As this is an issue that central banksaround the world are now facing, it is worthstressing a key element of the Bank of Canada’sapproach to dealing with supply shocks withoutraising interest rates. In Freedman’s (p. 183)words:

Indeed, there may be circumstances in which thecentral bank can cope with an unfavourable priceshock without having to raise interest rates. If the[inflation] target is credible, with expectedinflation well anchored by the target, and if thecentral bank has gained widespread understandingand acceptance by the public of its position that itis willing to accommodate the first-round price-leveleffects of a price shock but not the second-roundor ongoing effects of inflation, there would be apossibility of absorbing the price shock withouthaving to move below capacity, and therefore,without interest rates having to rise.

This is important advice regarding the opera-tional challenges currently facing the global ITframework.

To sum up, this book provides a useful overviewof the challenges facing the IT policy framework,

both by pointing to the limitations of the underlyingtheory and, more importantly, by outlining theimportance of a transparent policy framework foranchoring expectations. The importance of thispoint cannot be overstated because it highlightsthe operational need for clear communication bythe central bank of its analysis of specific priceshocks if it is to retain credibility. Simplyannouncing and enforcing an inflation target willnot be sufficient to anchor expectations. For thisreason alone, the book should be of interest to allcentral bankers and students of monetary policy.

C

olin

R

ogers

University of Adelaide

REFERENCE

Marvin Goodfriend, 2007. ‘How the World AchievedConsensus on Monetary Policy,

Journal of EconomicPerspectives

,

21

, 47–68, pp. 424.

Water Resource Economics: The Analysis of ScarcityPolicies and Projects

, by Ronald C. Griffin(MIT Press, Cambridge, MA, 2006), 424 pp.

Water Resource Economics

is a must read. Infact, I would go as far as to say, it is a must buyfor every Australian involved in the analysis,development and critique of water policies. Thebook is also a must read for those interested inunderstanding the way water policies in the USAhave evolved and where opportunities for theirimprovement lie.

Ronald Griffin’s

Water Resource Economics

iswritten with two purposes in mind. The first purposeis to provide an insightful microeconomics textbook using water as the medium to demonstratewell rehearsed concepts. The second purpose is toshow people how to think about and analyse watersupply, water management and other related naturalresource management issues.

As a microeconomics textbook, this is the styleof book that I like. All the examples and casestudies derive from real world experience. Fromthe first chapter, the reader is forced to deal withcomplexity. Unlike many of the standard texts thatI have come across, problems and difficulties arenot assumed away. The approach is refreshing.The book has a sense of realism and relevance