Summary

In Financial Crises and Recession in the Global Economy , Roy E. Allen documents and explains the new uses of money and the new financial and trade flows in the global economic system. Approaching international political economy from an economist's perspective, he explores the theoretical significance for the discipline of taking economic globalization seriously.

Professor Allen argues that international financial markets absorb an increasing amount of money in order to operate effectively, making it less available for non-financial or GDP purposes. Professor Allen uses case studies of the 1982 world recession, the 1987 world stock market crash, the slumps of the early 1990s and a series of world debt crises, many of which are still continuing, to demonstrate that this has a crucial effect on the income velocity of money. This process explains movements in stock markets, changing debt-equity ratios of corporations and other recent trends are explained by these processes. Professor Allen shows that the globalization of financial markets and the related interest rate parity processes have been responsible for the large trade and investment imbalances of the 1980s. Economists, it is argued, have not had the tools for evaluating the impact of financial globalization and have therefore made increasingly unreliable predictions.

Addressing economists and non-economists alike in a clear and accessible manner, Roy Allen responds to the failure of existing paradigms such as Keynesianism and monetarism by developing elements of a new methodological approach which better approximates more global economic processes. In conclusion, he suggests ways in which the Group of Seven, the IMF and other institutions can more effectively monitor and react to recent changes in monetary velocity and financial flows.

Choice Review

In his revision to the first edition (CH, Jan'95), Allen (St. Mary's College of California) argues that changes in information processing technologies, deregulation, and the increasingly global nature of economic activity have fundamentally altered the workings of the international economic system since the 1970s. With the vast increase in financial flows, arbitraged interest-rate-parity equilibria in financial markets have come to dominate the more traditional determinants of exchange rate equilibrium--purchasing-power parities--a process strengthened by increasingly convergent financial strategies. This has meant that the large trade and investment imbalances of the 1980s and '90s are the result of international financial flows. Chapters follow on new forms and uses of money and the decline in velocity in the advanced economies; the experience of financial crises and recession since the early 1980s; and a conspectus of the author's proposed palliatives for the economic crises that tend to be endemic in the global economy--reducing the number of currencies through currency boards and monetary unions, encouraging more forward-looking financial markets, and ensuring sufficient liquidity in financial markets. Overall a repetitive, somewhat casual and overargued, but provocative book. Upper-division undergraduate through professional collections. D. E. Moggridge; University of Toronto