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Foundations of International Macroeconomics. By Maurice Obstfeld and Kenneth Rogoff. Cambridge Mass.: MIT Press, 1996. Pp. xxiii, 804. $59.95.
In their chapter on the open economy for the Handbook on Monetary Economics, Dornbusch and Giovannini predict that "No doubt in a decade the ruling paradigm will be three quarters new classical with just enough remnants of Mundell-Fleming to justify the term macroeconomics" [1, 1287]. They also predict that the new classical approach will bring "back some nominal fixity, albeit on grounds of optimality" [1,1287]. In this important book, Obstfeld and Rogoff bring open economy macroeconomics most if not all the way to this point. Their stated goal is to "show that one can address virtually all the core issues in international finance within a systematic modern approach that pays attention to the nuances of microfoundations without squeezing all the life out of this fascinating topic" [p. xiii]. I think they meet that goal, though perhaps the subject gasps a few times.
Before going on to a summary of each of the ten long chapters that comprise the book, I want to point out several of its general strong points. Obstfeld and Rogoff adopt a feature, often used in undergraduate texts, of boxes that present applications and empirical evidence on the models being considered. They do a good job of making the boxes interesting as well as closely tied in to the theoretical analysis. Another attractive feature is that, while other methods of intertemporal optimization are presented in two appendices, most such problems in...