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In a by now classic article, R.A. Mundell demonstrated that an open economy could maintain internal and external balance without using the exchange rate as a policy tool. This, he showed, could be done by using fiscal policy to produce internal balance, and interest rate policy to produce an imbalance on the capital account to offset whatever imbalance there might be on the current account. There have been two criticisms of this analysis. The first, fairly common in the literature, is that it presumes international capital movements are flows. If, as is often maintained, they are stock adjustments, a certain amount of funds will move in response to an interest rate rise, and then to produce a further reallocation of portfolios a further rise in interest rates will be required. It is thus concluded that Mundellian policy in the presence of a current account deficit would have to be not merely interest rates above those elsewhere, but interest rates rising higher and higher above those elsewhere. The second criticism was first suggested by H.G. Johnson, and later developed in detail by John Williamson. They attacked not the feasibility of the policy, but its desirability. They argued that the policy would produce resource misallocation, both because it compels the choice between home and overseas investment to be made exclusively on short‐term balance of payments grounds, and because it distorts the consumption/investment mix at home.

Monetary policy is still one of the most contested areas of modern economics,and since the original publication of Policy Makers on Policy much has changed. This new edition collects contributions from leading policy makers and practitioners to reflect on the aims and objectives of monetary policy and on what it can achieve, combining the old chapters from Gordon Brown, Tony Blair, Kenneth Clarke, Geoffrey Howe, Nigel Lawson, and others,with new perspectives from Mervyn King, Jean-Claude Trichet, Ernst Welteke, Otmar Issing, and Alastair Darling. A new far-reaching introduction from the editors Forrest Capie and Geoffrey Wood puts these important contributions to the discussion of economic policy in the new context. They look at what lessons can be learnt from the earlier discussions, what anticipations of present difficulties can be found in them and what, in other words,the comparatively recent past teaches us about how to deal with the turbulent present.The second edition of Policy Makers on Policy brings together otherwise inaccessible commentaries and reflections on policy by those involved in making it, along with a commentary on and context for their remarks. Thus the book will be of great interest and use to students of economics andpolitics, and indeed anyone with an interest in current economic developments and their roots in the past.

The recession which many countries experienced in the early 1990s had certain unusual aspects. Most notably, and common to all countries, was the behaviour of asset prices relative to the general price level. In consequence, reasons were sought to explain the special characteristics of the recession and as a result of the behaviour of asset prices attention turned to 'Debt-Deflation Theories' associated in different forms with Keynes and Irving Fisher. The contributors to this volume discuss the significance of debt deflation. Their striking common feature is that, on the evidence presented here, the behaviour of asset prices should not be of great concern to policy makers, or to those attempting to understand economic behaviour. However, residual doubts remain over the Japanese case.

This volume is the second collection of the series of lectures, held annually at City University, London, in honour of Henry Thornton, the renowned 19th Century monetary economist. As with Monetary Economics in the 1980s (0-333-46220-3), the essays by extremely eminent contributors are wide-ranging in both subject and approach but all develop topics considered by Henry Thornton over a century ago and link historical perspectives to contemporary debates about financial institutions and monetary economics.

It is claimed that mortgages are at present cheap so that people can afford higher mortgages, and hence more expensive houses, than previously. But that claim is based on money illusion. Nominal interest rates are at present 'low' primarily because of relatively low inflation. People contemplating mortgages should look at real values or they may face an unexpectedly large debt burden in the future.

It is often claimed that annuities are now 'expensive'. That claim is at least partly based on money illusion. Careful analysis shows that the current prices of annuities are largely the result of a decline in inflation expectations which has brought about a change in the income stream for annuities.