Guest Editorial: Overview of the Special Section on Advances in Macroeconomic Theory and Policy and International Money and Finance

Review of International Economics, 17(3), 533–535, 2009 DOI:10.1111/j.1467-9396.2009.00831.x Guest Editorial: Overview of the Special Section on Advances in Macroeconomic Theory and Policy and International Money and Finance roie_831 533..535 Georgios P. Kouretas and Athanasios P. Papadopoulos* 1. Introduction The Department of Economics of the University of Crete organizes annually since 1997 an international conference on Macroeconomic Analysis and International Finance. The articles included in this Special Section are refereed versions of papers presented at the 12th International Conference on Macroeconomic Analysis and International Finance held at the University Campus, Rethymno, 29–31 May 2008, in collaboration with RIE. The central theme of this conference was Advances in Macroeconomic Theory and Policy and International Money and Finance. Recent advances in research on macroeconomic theory and policy and international finance focused on four important policy-oriented topics were presented and discussed. These topics are the lessons from the optimum-currency-area theory, exchange rate volatility, the interaction of economic growth, education, and labor markets, optimal monetary and fiscal policy and convergence. Several important policy implications for the above areas are drawn from the papers in this Special Section. We open this issue with an overview of these papers. 2. The Theory of Optimum Currency Area: A Reconciliation Tavlas, in “Optimum-Currency-Area Paradoxes,” provides a critical assessment of the optimum-currency-area theory since its inception in the three classic works of Mundell (1961), McKinnon (1963), and Kenen (1969), which laid the foundations for all subsequent work in the area of the theory of optimum currency areas. The development of the optimum-currency-area paradigm, however, has not been a smooth one. After a rise in research activity during the 1960s, the paradigm fell from favor in the 1970s and 1980s, before it re-emerged as an active area of research. In his paper,Tavlas argues that decline of the theory as an active area of research partly reflects paradoxes that exist among the contributions of Mundell, McKinnon, and Kenen. These paradoxes emerge from the different perspectives that the founders of the OCA theory had on key issues: they arise mainly from the contradiction with respect to the optimal exchange rate regime that McKinnon’s openness criterion and Kenen’s diversification principle imply, as opposed to the initial arguments made by Mundell. Tavlas goes on to argue that the recent revival of the OCA theory is due, in part, to a reconciliation of those paradoxes, reflecting both developments in academic thought and the evolution of the international monetary system. * Kouretas: Department of Business Administration, Athens University of Economics and Business, GR-14304, Athens, Greece. E-mail: kouretas@aueb.gr. Papadopoulos: Department of Economics, University of Crete, GR-74100, Rethymno, Greece. E-mail: appapa@econ.soc.uoc.gr. © 2009 The Authors Journal compilation © 2009 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA 534 Georgios P. Kouretas and Athanasios P. Papadopoulos 3. Exchange Rate Volatility, Output Volatility, and Relative Prices In “Exchange Rate Volatility and Output Volatility: A Theoretical Approach,” Grydaki and Fountas develop a theoretical model in order to study the factors influencing exchange rate and output volatility and uncertainty. Within the framework of a small open economy under a flexible exchange rates regime and rational expectations they argue that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output, and trade balance. In addition, they show that the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks, while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. A final aspect of the analysis is the consideration of the relative effects of the determinants either of exchange rate volatility or output volatility are very sensitive to the parameter values. Kılıç in “Nonlinearity and Persistence in PPP: Does Controlling for Nonlinearity Solve the PPP Puzzle?”, provides a new look at the purchasing power parity (PPP) puzzle by suggesting a set of half-life measures conditional on various regimes in order to examine persistence in the PPP relation within nonlinear ESTAR models. The analysis is conducted with quarterly data for the modern floating exchange rate era for the eurozone currencies as well as for a set of major non-eurozone currencies. Kılıç employs normal sampling and simulated confidence intervals to estimate regime-dependent half-lives. Specifically, he computes regime-dependent confidence intervals for the point estimates by standard asymptotic normal methods and simulations. Furthermore, the performance of the regime-dependent half-life estimate is analyzed via simulations. This methodology is shown to capture well the persistence of departures from PPP in ESTAR models based on statistical testing and simulations. The main finding of the analysis is that there is substantial persistence in PPP deviations and variation in persistence across currency groups and overtime. Overall, it is argued that incorporating nonlinearities into PPP may not necessarily solve the PPP puzzle. 4. Economic Growth, Education, and Labor Markets In another contribution, namely “Market Work, Home Work, and Taxes: A CrossCountry Analysis,” Rogerson develops a simple model of labor supply that is augmented to allow for home production in order to explore and understand to which differences in taxes can account for differences in time allocations between the US and Europe. The introduction of home production is a key element in the model and leads to the observation that the elasticity of substitution between consumption and leisure is almost irrelevant in determining the response of market hours to higher taxes. This outcome is in sharp contrast to the findings of previous models without accounting for home production. However, the analytics of the model show that in order to account for observed differences in leisure and time spent in home production, we require to have a large elasticity of substitution between consumption and leisure, and a small elasticity of substitution between time and goods in home production. Zeira, in “Why and How Education Affects Economic Growth,” attempts to provide an additional explanation to the effect of education on economic growth. It is based on acknowledging that the process of industrialization and mechanization is crucial to economic growth. This process consists of using more and more machines to replace a growing number of tasks, which have been previously produced by labor. It is implied, © 2009 The Authors Journal compilation © 2009 Blackwell Publishing Ltd GUEST EDITORIAL 535 then, that these machines require workers who are educated—namely literate and know arithmetic—whose human capital is less specific and more general. The main result of the present analysis is that technology adoption depends negatively on the cost of education or on the barriers to acquire education. Furthermore, Zeira shows that if the cost of education is high, economic growth is slower and might even stop completely, creating a development trap. 5. Optimal Monetary, Fiscal Policy, and Convergence within EMU In “Fiscal Convergence, Business Cycle Volatility and Growth,” Furceri analyzes the effects of fiscal convergence on business cycle volatility and growth. The analysis is conducted with the adoption of several measures of fiscal convergence and business cycle volatility and is applied with the use of a panel of 11 EMU and 21 OECD countries and 40 years of data. The analysis leads to several important findings. First, it is found that countries with similar government budget positions tend to have smoother business cycles; that is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with smoother business cycles. Secondly, Furceri finds evidence that reduced business cycle volatility through higher fiscal convergence stimulates growth. Finally, it is shown that the empirical results are economically and statistically significant, and robust. The policy implications of these findings are important since fiscal convergence, especially in integrated economies as the EMU, played an important role. We would expect that fiscal convergence could result in a minimization of the possible stabilization costs associated with the creation of a common currency and through reduction of output volatility, to higher long-run growth as well. In “Monetary Union Enlargement, Fiscal Policy, and Strategic Wage Setting,” Sidiropoulos and Zimmer develop a theoretical framework for studying the effects of the enlargement of a monetary union on macroeconomic performances in the presence of strategic interactions between non-atomistic labor unions, monetary, and fiscal authorities. Three types of player are considered in this context: the central bank, the fiscal authorities, and large labor unions. The analysis shows that the integration of new identical member countries may give rise to beneficial effects, depending on the fiscal policymaking structure. Furthermore, Sidiropoulos and Zimmer argue that once national fiscal decisions are explicitly modeled, previous conclusions on the adverse effects of monetary union enlargement do not necessarily hold. Acknowledgements We wish to thank the discussants, referees, and all participants at the Conference whose comments have improved substantially the papers presented in this volume. We are also grateful to the University of Crete, the Greek Ministry of National Education and Religious Affairs, the Bank of Greece,ALPHA Bank, PROBANK, and EFG Eurobank for their generous financial support. Last but not least we would like to thank Ms Ioanna Yotopoulou for her superb secretarial assistance, as well as Mr Pericles Drakos and Mr Kostis Pigounakis for their technical support. © 2009 The Authors Journal compilation © 2009 Blackwell Publishing Ltd