Preface/Justification xiii Acknowledgments xxi Chapter 1 Setting the Context 1 The Problem with Uncritical Assumptions in a Less-Than-Perfect Economy 2 The Problem with Models in an Imperfect Economy 3 Four Characteristics of a Less-Than-Perfect Economy 4 Economic Policy Inconsistencies The Parable of Strange Bedfellows 13 Chapter 2 Dynamic Adjustment in an Economy: Frictions Matter 15 Introduction 16 Quantifying Frictions: Is the Long-Run Average a Useful Guide for the Future? 32 Modeling Dynamic Adjustment due to Economic Frictions: Decision Making in an Evolving World 49 Dynamic Economic Adjustment: An Evolution unto Itself 67 Appendix 68 A Case for the Multiple Markets: 1983 2008 68 The Labor Market: 1983 2008 70 Chapter 3 Information: Past Imperfect, Present Incomplete, Future Uncertain 73 Story Behind the Numbers 76 Conclusion 103 Chapter 4 Price Adjustment and Search for Equilibrium 105 What Barriers Are There to Perfectly Flexible Prices? 107 Implications 112 Finding Dynamic Adjustment in the Data 116 Conclusion 121 Chapter 5 Business Investment: This Time Is Different 123 Drivers of Business Spending 125 Putting It All Together: Explaining Slow Recovery in Capital Investment 134 Chapter 6 Corporate Profits: Reward, Incentive, and That Standard of Living 135 Introduction: Profits as Essential Partner 136 The Role of Profits in the Economic Cycle: Five Drivers 137 The Role of Profits: Incentives and Rewards 140 Concluding Remarks: Modeling Profits 167 Chapter 7 Labor Market Evolution: Implications for Private-Sector and Public-Policy Decision Makers 169 Part I: Labor Market Imperfections 171 Part II: Heterogeneity in the Labor Market 182 Part III: How Do Secular Labor Market Trends Impact Economic Policy? 196 Chapter 8 Inflation: When What You Get Isn t What You Expect 205 Introduction 206 What Is Inflation? 207 Why Does Inflation Matter? 208 What Determines Inflation? 212 Inflation after the Great Recession 219 Application: Predicting if Central Banks Can Achieve Price Stability 230 Chapter 9 Interest Rates and Credit: Capital Markets in the Post Great Recession World 235 Imperfect Guidance in an Uncertain World 236 A Look at Actual History over the Long Run 247 Credit and Administered Rates 250 Imperfect Information and Credit 255 Conclusion: Shift from Historical Benchmarks 280 Chapter 10 Three-Dimensional Checkers: Open Economy, Capital Flows, and Exchange Rates 281 Newton s Third Law 282 Introducing a New Price to the Analysis: The Role of Exchange Rates 289 Three-Dimensional Checkers on an International Playing Field 295 A Perfect Model in an Imperfect World 298 Concluding Remarks: Future Looks Different 330 Chapter 11 Assessing Economic Policy in an Imperfect Economy 331 Generalized Policy Model 333 Rules and Reputation: Beyond Economic Benchmarks 338 Confronting Our Three Market Imperfections 340 Economic Policy in the Context of an Imperfect Economy 359 About the Authors 361 Index 363
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.