Economic Modeling in the Post Great Recession Era: Incomplete Data, Imperfect Markets

PRAISE FOR ECONOMIC MODELING in the POST GREAT RECESSION ERA

"The years since the end of the Great Recession have been an era of disappointing economic performance in which the long–awaited (and long–expected) return to pre–recession trends has been slow to materialize. The authors of this fine new book develop the theme that the Great Recession marks a structural break that has had long–lasting effects on the trend paths of the economy and then explain and demonstrate how to construct useful econometric models that account for this new reality. Highly recommended!"
Rob Roy McGregor, Professor of Economics, Belk College of Business, UNC Charlotte

"John, Azhar, and Sarah′s book combines a practical examination of an imperfect economy with a focus on current issues of jobs, inflation, and credit markets. The book recognizes structural change in the 21st century economy and does not engage in wishful thinking hoping for a return to a simpler, idealized economic landscape. This is the type of thinking we need in the post Great Recession era."
Larry Kudlow, The Larry Kudlow Show, Kudlow & Co., LLC

"It has been well–documented that nobody has been more right about the economy since the Great Recession began than John Silvia. Anyone who wants to understand what has been going on, model it, or think about how to improve it, needs to read this book."
Kevin Hassett, Director of Economic Policy Studies, AEI

Preface/Justification

Acknowledgments

Chapter 1: Setting the Context

The Problem with Uncritical Assumptions in a Less Than Perfect Economy

The Problem with Models in an Imperfect Economy

Four Characteristics of a Less than Perfect Economy

Economic Policy Inconsistencies The Parable of Strange Bedfellows

Chapter 2: Dynamic Adjustment in an Economy: Frictions Matter

Introduction

Quantifying Frictions: Is the Long–run Average a Useful Guide for Future?

Modeling Dynamic Adjustment Due to Economic Frictions: Decision Making in an Evolving World

Dynamic Economic Adjustment: An Evolution Unto Itself

Appendix

Chapter 3: Information: Past Imperfect, Present Incomplete, Future Uncertain

Story Behind the Numbers

Conclusion

Chapter 4: Price Adjustment & Search for Equilibrium

What barriers are there to perfectly flexible prices?

Implications

Finding Dynamic Adjustment in the Data

Chapter 5: Business Investment

Drivers of Business Spending

Putting All Together: Explaining Slow Recovery in Capital Investment?

Chapter 6: Corporate Profits: Reward, Incentive and That Standard of Living

Introduction

The Role of Profits in the Economic Cycle: Five Drivers

The Role of Profits in the Economy

Concluding Remarks

Chapter 7: Labor Market Evolution: Implications for Private Sector and Public Policy Decision Makers

Labor Market Imperfections

Part II: Heterogeneity in the Labor Market

Part III: How Do Secular Labor Market Trends Impact Economic Policy?

Chapter 8: Inflation

Introduction

What Is Inflation?

Why Does Inflation Matter?

What Determines Inflation?

Inflation After the Great Recession

Application: Predicting If Central Banks Can Achieve Price Stability

Chapter 9: Interest Rates and Credit

Imperfect Guidance in an Uncertain World

A Look at Actual History over the Long–Run

Credit Section

Imperfect Information and Credit

The Policymaker s Catch–22 the Dynamic Inconsistency of Current Policy and Implications for Private Decision Makers

Predicting Yields Multivariate Analysis

Do Global Yields Correlate with U.S. Yields?

Credit Spreads: A Break with History

Patterns since the Great Recession: Corporate Debt Yields and Equity Earnings Case Against the Central Wisdom of Low Volatility

Identifying a Structural Break

Conclusion

Chapter 10: Three Dimensional Checkers: Open Economy, Capital Flows and Exchange Rates

Newton s Third law

Three Dimensional Checkers on an International Playing Field

A Perfect Model in an Imperfect World

A Model for Policy Not the Real World

Violation of Three Conditions for Perfect Competition

Imperfect Information and Price/Policy Maker Discovery

Persistent Disequilibrium in Prices and Exchange Rates Dynamic Adjustment Problem

Price Adjustments: Limits by Policymakers

Capital Flows and Treasury Yields in the Post–Great Recession Era

Is the Post–2007 Economy Structurally Different?

Tracking U.S. Capital Flows: What Has Changed?

Are Global Treasury Yields Mean–Reverting?

Concluding Remarks: Future Looks Different

Chapter 11: Assessing Economic Policy in an Imperfect Economy

Generalized Policy Model

Rules and Reputation: Beyond Economic Benchmarks

Confronting Our Three Market Imperfections

Economic Policy in the Context of an Imperfect Economy

About the Authors

Index

JOHN E. SILVIA is a managing director and the chief economist for Wells Fargo. Previously he worked on Capitol Hill as senior economist for the U.S. Senate Joint Economic Committee and chief economist for the U.S. Senate Banking, Housing, and Urban Affairs Committee.

AZHAR IQBAL is director and econometrician at Wells Fargo Securities.

SARAH WATT HOUSE is vice president of Wells Fargo Securities.