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Introduction Over the past fifty years or so we have seen a veritable fragmentation of economic theory. Research has ramified in different directions and its very foundations – methods and techniques of analysis, crucial concepts and simplifying assumptions, central problems – have undergone broad diversification. This has led to a division of labour among substantially autonomous groups of economists who often ignore, or in any case do not take into account in their own research, what happens in other areas of research. This trend has been reinforced by the high level of technicality that, together with diversification in the techniques of analysis, makes the studies required for any given field of research increasingly specific and time-consuming. For instance, the new evolutionary theories of the firm have no relation to research on the microeconomic foundations of macroeconomics; it would be quite difficult to find some common ground between research on the institutional evolution of financial markets and the so-called ‘new growth theory’ which seeks to make technical progress endogenous to the theory itself. Economists become ever more specialised and increasingly limit their readings and their professional contacts to researchers active in the same field and pursuing a similar research orientation; increasing numbers of specialised journals and professional societies are created; the very processes of academic selection favour the fragmentation of economists into separate corporations. It is thus quite difficult, in this situation, to provide a reasonably balanced and complete illustration of the different streams of economic research. [ABSTRACT FROM AUTHOR]

Life and works David Ricardo was born in London in 1772. He was the third of at least seventeen children of a well-to-do stockbroker, a Sephardic Jew. Following the family traditions, from eleven to thirteen years of age David studied in Amsterdam, an important financial centre that had recently lost its supremacy to London, and from where the Ricardo family came (although it seems that its original roots were in Portugal). Back in London at the age of fourteen, David began work in the stock exchange with his father. Soon, however, he was to become the protagonist of a romantic story: falling in love with a young Quaker girl, on reaching the age of twenty-one he married her against his family's wishes, and was disowned. Thus compelled to launch out on his own, thanks to his ability and the connections acquired while working for his father he soon succeeded in reaching an important position in the business community. It was precisely his work at the stock exchange that prompted him to systematic consideration of the economic vicissitudes of the country. An important stimulus, for instance, came with the suspension of gold convertibility by the Bank of England in February 1797. While on holiday at Bath, in 1799, Ricardo happened to read Smith's Wealth of nations, a book then twenty-three years old but established as the main reference work in the field of economic science. Ricardo was not a scholarly type, but he had a logical mind and sharp intelligence. [ABSTRACT FROM AUTHOR]

The inter-governmental conference convened to revise the Treaty of Rome, initiated at the end of 1990 and concluded at the Maastricht summit one year later, signalled the formal beginning of the process towards economic and monetary union (EMU). The Maastricht approach favoured gradualism over a rapid transition towards the adoption of a single currency. Gradualism was justified on the grounds that convergence of macroeconomic variables is a pre-condition of EMU and that time would be needed to set up new European monetary institutions. The events that occurred during the summer of 1992 have cast a shadow over the Maastricht approach. The Treaty was first rejected by the Danish voters, and later won a wafer-thin majority in France. Meanwhile, the uncertainty about the outcome of these votes, and the lack of progress of some countries in implementing their convergence programmes, combined with the uncompromising attitude of the German monetary authorities, put pressure on the European monetary system. After 13 years of steady progress during which the system had expanded from eight to eleven members, and almost six years since the last realignment, the exchange rate mechanism eventually broke up. In September 1992, the United Kingdom and Italy withdrew from the exchange rate mechanism and Spain and Ireland resorted, albeit temporarily, to exchange controls. [ABSTRACT FROM AUTHOR]

Introduction In recent years, countries in the European monetary system (EMS) have pegged their exchange rates to the Deutschmark in an attempt to reduce their inflation to German levels. Although there have been no realignments since 1987, inflation rates have been slow to adjust. Indeed, from the evidence of European inflation indices over the period 1987–91, the authors of the report on monitoring European integration (CEPR 1991) concluded: ‘There is no doubt … that inflation convergence has not occurred and it is not occurring. The differential between higher-inflation countries and Germany has recently fallen; but this has been almost entirely due to a surge in the German inflation rate which is believed to be temporary’. We examine three possible reasons for the sluggish inflation response observed in the EMS. Some observers have stressed the role of staggered wage setting in perpetuating inflation and have recommended synchronizing pay settlements as an institutional solution, see for example Layard (1990). This chapter begins, therefore, with an investigation of the link between inflation persistence and overlapping contracts in the rational expectations models of John Taylor and Stanley Fischer (where wage settlements are for two periods, but two groups alternate in making settlements). We do find some inflation persistence, but only for one period. [ABSTRACT FROM AUTHOR]

A brief summary of the highlights of the nineteenth century will serve as a background to later developments. I draw heavily on secondary sources, Fetter (1965), O'Brien (in his fascinating introduction to The correspondence of Lord Overstone, 1971: 70–82) and Viner (1937). The first two do not concentrate specifically on international considerations, but then the early monetary discussions distinguished less than did later ones between closed and open economy analysis. This justifies the muted distinction made by writers such as Fetter and O'Brien (and even, to a certain extent, Viner). I can think of several reasons for this: The openness of the British economy, which led naturally to the assumption that one was dealing with an open economy model. By contrast, the American economy (whence much of the later discussion issued) was, at least until recently, relatively closed. The institutional differences: throughout most of the nineteenth century, a metallic standard meant that bank notes were convertible into gold (and/or silver) at will, whether internally or externally. Thus, issues of the integrity and convertibility (into metal) of the liabilities of either the central or private banks were essentially independent of who was demanding the specie or bullion and what they planned to do with it. Bagehot indeed did distinguish between internal and external drains, but this came later, towards the end of the nineteenth century. Most of the literature I shall deal with here is British. [ABSTRACT FROM AUTHOR]

The adjustment mechanism This study deals with some topics in the development of the theory of international adjustment. Other names for it are: international monetary economics, the macroeconomics of an open economy, the theory of the balance of payments (or the theory of exchange rates). It sometimes includes some well-known specific sets of questions, such as the “transfer problem”, and the “theory of devaluation”. There are those who argue that there is no such thing as a separate theory of the balance of payments, or of exchange rates. This is true in the same sense that there is not a separate theory of labor market adjustments, of investment, or of taxation. All of these are (correctly) viewed as part of a general equilibrium system. Most economists, nevertheless, find it convenient for various purposes to single out pieces of that general model and scrutinize them more closely. As long as there are different “countries” (which can be defined as units with their own money and monetary institutions) and as long as transactions with residents of the same country are viewed differently from those involving residents of other countries – so long does it make sense to look at this section of a general-equilibrium system with a closeup lens. This in no way denies its “general equilibriumness”. In any event, I am dealing here with the history of ideas. I did not invent the field – I am merely studying it. [ABSTRACT FROM AUTHOR]