I. INTRODUCTION

Recent economic events, including the financial crisis and attendant global recession of 2007-2008, exposed serious weaknesses in our profession's collective understanding of the relationship between macroeconomics and finance, particularly as this relationship impinges on, and is impacted by uncertainty and inequality. This issue of Economic Inquiry includes a Symposium on Inequality, Uncertainty, and Macro-financial Dynamics, which presents a selection of recent research papers intended to increase our understanding of macro-financial dynamics--the dynamics of asset pricing, exchange rates, interest rates and business cycles--within the context of crisis, uncertainty, and inequality. (1)

II. CONTRIBUTED WORKS

The first two papers of the Symposium consider the macro-financial impacts of crises. In "Do Terrorist Attacks Impact Exchange Rate Behavior? New International Evidence" Paresh Kumar Narayan, Seema Narayan, Siroos Khademalomoom, and Dinh Hoang Bach Phan assess whether and how terrorist attacks affect international currency markets. The literature is replete with studies demonstrating the negative impact of terrorist attacks on various macro-financial aggregates, including gross domestic product growth and asset market performance, but before Narayan et al.'s effort, the effect of these attacks on exchange rates was largely unexamined. The hypothesis is that a terrorist attack affects currency markets in much the same way other types of negative economic news does, and therefore can lead to either overshooting as in Dornbusch (1976) or undershooting as in Frenkel and Rodriguez (1982). Using high frequency currency-market data covering the United States and 21 other countries, Narayan et al. find that terrorist attacks do significantly affect the dynamics of exchange rate returns in 18 of 21 countries. Interestingly, the authors point to heterogeneity in the findings: terrorist attacks lead to exchange rate appreciation in 11 countries and depreciation in seven countries. Further, while the effect persists for some countries, it seems to be somewhat transitory for others.

In the second paper, "Financial Markets' Shutdown and Re-Access," Luca Agnello, Vitor Castro, and Ricardo Sousa also consider financial market behavior in the presence of crisis, in this case in the form of sovereign default. The authors use a duration model and data for 121 countries over 40 years to assess, conditional on a default episode, what factors determine how long the country will remain shut out of international credit markets. Understanding these factors helps explain why some countries regain access to international credit markets more quickly than others, following a default. The authors find that shut-out duration matters: the longer a country is shut out of financial markets the less likely re-access to financial markets will be granted within a given window. The authors further demonstrate the importance of the degree of economic growth, financial openness, political stability, and default history on the likelihood of financial market re-access. In particular, the longer the period of economic growth and the greater financial openness, the higher the chances of market re-access within a given window.

The next two papers focus on inequality. In "Inequality and Growth in the United States: Why Physical and Human Capital Matter" Nikos Benos and Stelios Karagiannis take up the timely and pressing issue of whether income inequality negatively impacts economic growth. The hypothesis of the paper aligns with a central prediction of the Galor and Moav (2004) (GM) model of inequality and growth: as high-income earners have high propensities to save and as low-income earners face credit constraints, income inequality will lead to an over-accumulation of physical capital relative to human capital; and since human capital accumulation is a primary driver of growth, income inequality will subsequently depress growth in the short run. The GM model also predicts that as income and wealth levels increase more broadly, credit constraints are loosened which allows for even low-income earners to invest in human capital, ultimately reversing income inequality's negative impact. Using a panel of U.S. state-level data, the authors test this hypothesis, and find a negative relationship between top income inequality and economic growth in the short run; and further, they find that this relationship disappears in the long run, as predicted by the GM model. The authors also demonstrate considerable cross-state heterogeneity.

In "Latin America's Declining Skill Premium: A Macroeconomic Analysis" Juan Guerra-Salas considers the decrease in income inequality experienced by Latin American countries during the 2000s. The author's approach is to develop and estimate an open economy dynamic stochastic general equilibrium model featuring a low-skill non-tradable sector, and augmented by shocks to commodity prices and international interest-rate spreads. The author shows that favorable shocks to commodity prices or rate spreads leads an increase in demand for both low- and high-skill labor, but because low-skill is associated with the non-tradable sector, the relative wage of low-skill workers rises--the skill premium falls--leading to a reduction in income inequality. The author also provides quantitative assessments of the identified causal mechanisms, finding that they explain approximately 20% of the reduction in the skill premium.

The final paper concerns monetary policy and uncertainty. In "European Central Bank Footprints on Inflation Forecast Uncertainty" Svetlana Makarova investigates whether the common monetary policy implemented by the European Central Bank has served to reduce inflation uncertainty across the European Union. The particular hypothesis under scrutiny is whether the reductions in uncertainty due to monetary policy have converged over time to a value common across countries. Using a bootstrap approach on data from 16 Eurozone countries, the author concludes that while the presence of idiosyncratic effects on inflation uncertainty may result in divergence among some Euro Area countries, the data broadly support the convergence hypothesis. The author concludes that without the unifying policy of the European Central Bank, uncertainty divergence would have been more severe.

III. CONCLUSION

The models and theories that dominated the macroeconomic and macro-financial literature during the late 1990s and early 2000s remain, by and large, the benchmarks against which our scientific progress is measured; however, the events of the late 2000s onward have exposed serious gaps in our understanding of economics. The impacts of the economy on, and the responses of the economy to crisis, uncertainty, and inequality in particular remain poorly understood. The papers collected in this Symposium serve to shed some light on these impacts and responses, and, in some cases, provide policy prescriptions. It is our hope that this collection will give guidance and direction for further research.

ABBREVIATION

GM: Galor and Moav

REFERENCES

Dornbusch, R. "Expectations and Exchange Rate Dynamics." Journal of Political Economy, 84(6), 1976, 1161-76.

Frenkel, J., and C. A. Rodriguez. "Exchange Rate Dynamics and the Overshooting Hypothesis." IMF Staff Papers, 29, 1982, 1-29.

Galor, O., and O. Moav. "From Physical to Human Capital Accumulation: Inequality and the Process of Development." Review of Economic Studies, 71, 2004.1001-26.

(1.) The selected papers were presented at the Fourth International Symposium in Computational Economics and Finance held in Paris in April 2016.

Jawadi: Professor, Department of Finance. University of Evry, 91000 Evry, France. Phone +33668504520. E-mail [email protected]

McGough: Professor, Department of Economics, University of Oregon, Eugene, OR 97403. E-mail [email protected]

doi:10.1111/ecin.12526