.I. Marquez, Book reviews 423

pricing to market, firms do not change their prices because their activities involve sunk costs and other market imperfections. Thus the story is not inconsistent with the evidence at the aggregate level. But recent work by Ellen Meade of the Federal Reserve suggests that disaggregating import prices provides a more reasonable explanation of the seemingly slow rate of response of the aggregate import price: the price of computer imports has a downward trend, whereas the price of noncomputer manufacture imports has an upward trend. An aggregate import price that includes import prices with opposite trends could exhibit a relatively flat time profile even if pricing to market were not present.

References

Goldstein, M. and M. Khan, 1985, Income and price effects in foreign trade, in: R. Jones and P. Kenen, eds., Handbook of international economics, Vol. 2 (North-Holland, Amsterdam).

Vining, D. and T. Elwertowski, 1976, On the relationship between relative prices and the general price level, American Economic Review 66, 699-708.

David A. Kendrick, Feedback: A New Framework for Macroeco- nomic Policy (Kluwer Academic Publishers, Netherlands, 1988).

This book describes the Feedback Approach to macroeconomic policy. The presentation is clear and nontechnical, two features that make the book accessible to a wide audience. After motivating the use of feedback rules, Kendrick develops the arguments for the Feedback Approach in three sections: Section I explains the components of this approach; section II presents its applications to policy questions; and section III outlines its limitations. The book concludes in section IV with a summary.

Kendrick argues that developing macroeconomic policy involves setting goals, allowing for dynamics, and recognizing uncertainty. Setting goals (chapter 3) means specifying the paths for key macroeconomic aggregates along with their priorities. Allowing for dynamic effects (chapter 4) recog- nizes that policy actions do not have an immediate effect because of delays in behavioral responses. Finally, recognizing uncertainty in the functioning of the economy (chapter 5) implies that policy outcomes are uncertain. This uncertainty stems from three sources: unanticipated events (shocks), behav- ioral responses, and measurement errors. Overall, the section does not offer either new techniques or new applications of old techniques, but the clarity of exposition makes accessible to most economists an otherwise difficult subject.

In section II, Kendrick develops the notion of feedback rules (chapter 61, derives the confidence regions for the policy outcomes associated with these rules (chapter 7), and illustrates their applicability using automatic stabilizers (chapter 8). Th e main message of this section is that the feedback approach

424 J. Marquez, Book reciews

incorporates the essentials of policy analysis: goals, dynamics, and uncer- tainty. Applying this approach involves determining confidence regions throughout the policy horizon and evaluating their sensitivity to different policy instruments.

Section III presents the limitations of the feedback approach: choice of optimizing criterion (chapter 9>, public reaction to policies (chapter lo), model dependency (chapter 111, and decentralized policy decisions (chapter 12). Because feedback rules are based on a model and an objective function, they change when either of these two components changes. To evaluate the importance of this dependency for policy outcomes, Kendrick suggests per- forming sensitivity analysis. Decentralized policy decisions undermine the usefulness of the feedback approach because of the difficulties in coordinat- ing government branches with genuine disagreements on both the need for policy responses and their effects. Unfortunately, eliminating the drawbacks of decentralization involves complicated options some of which are not desirable.

Public reactions to feedback rules preclude treating the economy as though it were an object with a predetermined course. To address this limitation, Kendrick offers three alternatives to policymakers. First, monitor the interac- tion between the announcement of the rule and the behavior of the economy, and update the rule if this behavior changes. This recommendation is not viable from a practical standpoint. Second, incorporate all of the game-like interactions between the government and the private sector in the design of the feedback rule. Because of computational constraints, this recommenda- tion has not been implemented yet in the large-scale models used in policy analyses and business forecasting. Finally, ignore the consequences of these reactions because the associated changes in the structure seem small. This recommendation is the most commonly accepted practice.

The empirical evidence is ambiguous as to whether this last practice is wholly unwarranted. For example, the introduction of the Social Security System in the United States in the 1930s did not change the estimated marginal propensity to consume. Furthermore, the decision to abandon the fixed-exchange-rate system in the 1970s has not, so far, resulted in dramatic changes in the estimated income elasticities for trade. But on the other hand, the recent deregulation of the US financial market seems responsible for the changes in the estimated interest sensitivity of money demand equations. This conflicting evidence suggests that an eclectic attitude is the best ap- proach for evaluating the importance of public reactions to feedback rules.

By being clear and intuitive, Kendrick’s book will appeal to policymakers without technical training, students of macroeconomics at the intermediate level, and anyone interested in learning what control theory has to offer to economic policy making.