G ERMANY iS in the headlines, not because of super performance but rather because it seems to be on the ropes. Inflation fighting, once again, is taking its toll on growth in Germany and in all of Europe; the instant integration project for East Germany has translated into massive unemployment there and an extraordinary financial cost to come for a decade or more in the West. Prospects for an integrated Europe, with a common money and fully integrated markets and joint policies are moving off the screen. If there ever was a miracle, today one is badly needed. The complacent, self-satisfied, overweight, and overpaid Germany is not coping well with the challenges. The timely and important book by Giersch, Paque, and Schmieding fills a gap in the economic history of West Germany (at least in the English language) and it does so in a thoroughly professional and substantial way.' The authors have set for themselves two tasks, to provide an account of events and to lay out a set of explanatory economic hypotheses in the tradition of free market economics. They provide an almost blow-by-blow account of events and trends, and a record of opinions to document where Germany came from and where it went. The book is fully successful in this objective and thus deserves attention from students of German economic history. Curiously the authors explicitly exclude economic historians from their readership and invite the interest of applied economists; let no student of economic history be put off by this unjustified exclusion. The book comments on German postwar economic events in a chronological fashion. A rundown of the chapter titles will give an immediate impression of postwar history, the issues, and the authors' angst: stylized facts 1945-90; 1945-48: establishing a liberal order; 1948-60: spontaneous growth; 1960-73: toward managed growth; 1973-90: facing the slowdown; two cheers for German unification; a new miracle? No question, as a record this book is superb. The most interesting part is the account of the immediate postwar reconstruction, including monetary reform and decontrol. This is where the miracle happened most conspicuously as Henry Wallich (1955) described so well. The bold write-down of the monetary overhang is just one of the reforms of the time that would have been instructive for the Soviet Union in the past few years. In this context one cannot pass up recounting the Allied reaction to price liberalization in Germany. The turnaround of Germany in 1948 was nothing short of a miracle. From one day to the next, productive forces were unleashed to let recovery and growth proceed at breakneck speed. The move from a socialist control economy to the free market was bold. One Sunday in 1948, while the Allied supervisors were not watching, Economics minister Erhard lifted summarily all price controls. Jossleyn Hennessy (1964, p. 5) reports how it all started:

The new classical macroeconomics (NCM) is not particularly useful in explaining stark episodes. To be successful, the new classical approach will have to be developed in a number of areas including coordination problems and political economy issues of stabilization. These modifications can in principle be worked into the NCM classical approach, but that will change the main thrust. So far, the message reads: markets clear, productivity shocks are the dominant source of fluctuations, intertemporal substitution in consumption and labor supply are the chief amplifying factors, and government policy is substantially irrelevant. On these key propositions, the evidence fails and the emphasis is misdirected. The issue is not whether markets work, but rather how they work, a concern rightly emphasized by the new Keynesian economics.

[The adjustment of relative prices to exchange rate movements is explained in an industrial organization approach, using various models. The extent of price adjustment, given labor costs in the respective currencies, is shown to depend on product substitutability, the relative number of domestic and foreign firms, and market structure. Some empirical evidence is offered to support the theory.]

This paper develops a approach to the theory of currency devaluation.1 The approach is monetary in several respects. The role of the real balance effect is emphasized and a distinction is drawn between the relative prices of goods, the exchange rate and the price of money in terms of goods. Furthermore, money is treated as a capital asset so that the expenditure effects induced by a change are spread out over time and depend on the preferred rate of adjustment of real balances.2 The latter aspect gives rise to the analytical distinction between impact and long-run effects of a devaluation. The first part of this paper develops a one-commodity and two-country model of devaluation. The simplicity of that structure is chosen quite deliberately to emphasize the aspect of the problem as opposed to the derivative effects that arise from induced changes in relative commodity prices. Trade is viewed as the exchange of goods for money or a means of redistributing the world supply of assets. A devaluation is shown to give rise to a change in the level of trade and the terms of trade, the price of money in terms of goods. In the second part the implications of the existence of nontraded goods are investigated, and induced changes in the relative prices of home goods enter the analysis.

The paper investigates the optimal time path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rate. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate.

The paper investigates the optimal time path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rate. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate.