REVIEWS I87 A final criticism of the volume is that certain of the authors, for example Luigi De Rosa who writes on Italy, and Bruno Fritzsche who writes on Switzerlandsometimeslose sightof the relationshipbetween economic change and nationalism,and concentrateon the formerto the detrimentof the latter. Nevertheless, a volume that is as good as this should not be condemned for these lapses.As indicated earlierthis is a valuable text of use to a wide variety of scholars from post-graduate level upwards. Practitionerscould also learn something from it. In particular,the chaptersby ChristophBoyer on CzechGerman relations in pre-war Czechoslovakia,Yudanov on economic change and the national question in twentieth-century USSR/Russia and Herbert Matison twentieth-centuryAustriadeserveto be singledout forspecialpraise. Department ofPolitics KARL CORDELL University ofPlymouth Gupta, Kanhaya L. and Lensink,Robert. Financial Reforms inEastern Europe: A Policy Modelfor Poland. Routledge, London andNew York,I998. xiii + I9I pp. Tables. Figures.Notes. Index. ?6o.oo. THISbook presents an econometric model of the economy in transition, focusingon finance. Data forestimateshave been takenfromPoland,between December i99I and May I996. The model takes into account three private economic agents: households, commercial banks and firms, plus the central bankand the centralgovernment. The decisions of the private agents are modelled as a portfolio selection. The portfolio of banksconsistsof real loans to firms,holdings of government securities,real excess reserves,and real net borrowing from the centralbank (negative assets).Loans to the household sectors are not considered, as they play a marginalrole duringthe initialperiod of transition.Banksselect assets takinginto account expected returnsand adjustmentcosts(sothat actualasset demands partially adjust to the desired asset demands in each period). An interestingfeature of the model is the explicit presence of the default rate for firm loans, which decreases the net expected returnson loans. This variable proveshighly significant,on the one hand indicatingthe rationalbehaviourof the banking sector, and on the other, the scope for increase in finance, if the qualityof loan selection improves. The household sector portfolio consists of real stock of: currency, zloty demand deposits, zloty time deposits, foreign currency demand deposits, foreign currency time deposits, net foreign assets and net other assets. Decisions on the portfolio selection are taken jointly with savingsconsumption . The interestingfeatureof the portfoliois the significantshareof foreign currency-denominated assets, which serve mainly as an inflation hedge. However, the role of this asset has decreased during the transition period. The firm'sportfolio consistsof capital stockand depositsheld both in zloty and foreign currency. Firms finance their incremental demand for assets through domestic bank loans, real foreign direct investment and retained earnings. Rates of returnsare net of taxes and inflation. Econometric results i88 SEER, 8o, I, 2002 show that the rate of investmentis stronglyand positivelyaffectedby retained earningsand stronglyand negativelyaffectedby the loan rate.In addition,the simulation results show that the relaxation of liquidity constraint leads to increasedcapitalaccumulationratherthan to accumulationof financialassets by firms. One of the particularproblems noticed by the authors is that the model cannot distinguish between the behaviour of state and private firms, because the relevantdata is not availableon the monthlybasisrequiredby the model. The main monetarypolicy instrumentsof the centralbankare the discount rate and the required reserve ratios. The exchange rate partially follows inflation, as a crawling peg, with implicit appreciation of zloty built into the trend.Real governmentconsumptionismodelled asa fixedshareof aggregate demand. The government deficit is financed by the central bank and by commercial bank borrowing. The importance of the former has been decreasing throughout the period. On the other hand, the latter led to crowding out of private loans by government loans, which seriously affects loan supplyto firms. The trade balance is determined by the real exchange rate and the total demand for goods (approximatedon the basis of real GDP). The supplyside of the economy is described by the Cobb-Douglas production function in labour and capital. Demand for labour is a function of demand for final products and wage cost. An interestingfeature of the latter is that it includes financial cost (i.e. is adjustedfor the loan rate), as labour expenses have to be financed by bank loans. The cost, therefore, of working capital is a relevant factor. Nominal wages are determined by the Philips curve equation, as a function of inflation (positive) and increase in unemployment...