NANCY STOKEY AND ROBERT LUCAS, JR., and Ed Prescott have produced an exceptionally useful, thorough, and timely introduction to stochastic economic dynamics. Dynamic optimization techniques developed in Operations Research, formulated initially by Richard Bellman (1957), have been used extensively in economics, particularly in macroeconomics, finance, and public finance. Economic theorists have extended dynamic programming theory in several valuable directions. Of particular note for this book is the concept of recursive equilibrium introduced in Edward Prescott and Rajnish Mehra (1980). While these techniques have been used extensively, there has been no broad, unified, and comprehensive presentation of the concepts, tools, and applications of recursive dynamic techniques that is written for economists and demands no more mathematics than a typical student is exposed to in a good graduate program. This book succeeds marvelously in filling this need. Furthermore, given the depth of development, it is also a valuable reference for researchers. Before describing the book's contents in detail, we should discuss what is distinctive and important about the recursive approach to dynamic economic problems. To do this, let's examine a simple problem and an alternative approach to its solution. The canonical problem for economic dynamics is the infinite horizon deterministic growth problem. Let k, be the capital stock at the beginning of period t, f(kt) a neoclassical production function expressing period t production as a function of kt, ct consumption in period t chosen at the end of the period, u(c) a concave utility function, and I the discount factor. Then a social planner for this infinitely lived economy will solve the problem

Many important questions in macroeconomics concern the impact of taxation and spending policies on private resource allocation. One approach, typified by Robert Hall (1971) and William Brock and Stephen Turnovsky (1981), is to use dynamic general equilibrium models to address basic issues in fiscal and tax policy. The objective is to explicitly examine macroeconomic issues without embracing the market imperfections (fixed prices, missing markets, money illusion, etc.) found in conventional macroeconomic analysis. There is currently great interest in dynamic fiscal policy problems. This decade has already seen two major adjustments in tax policy, and many attempts to substantially alter spending patterns. The result of this tumult has been unprecedented peacetime deficits and much uncertainty about what measures will ultimately be used to bring the budget into balance. In this paper, I discuss the impact of alternative fiscal policies in a dynamic general equilibrium model. I examine the shortrun effects of fiscal policy changes, the efficiency cost of alternative dynamic tax policies, the effects of uncertain policy formation, and the redistributive effects of factor taxation.