Skip to main content

Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy




Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy

John E. Silvia

ISBN: 978-1-118-10095-0 June 2011 400 Pages

Download Product Flyer

Download Product Flyer

Download Product Flyer is to download PDF in new tab. This is a dummy description. Download Product Flyer is to download PDF in new tab. This is a dummy description. Download Product Flyer is to download PDF in new tab. This is a dummy description. Download Product Flyer is to download PDF in new tab. This is a dummy description.


A comprehensive analysis of the macroeconomic and financial forces altering the economic landscape

Financial decision-making requires one to anticipate how their decision will not only affect their business, but also the economic environment. Unfortunately, all too often, both private and public sector decision-makers view their decisions as one-off responses and fail to see their decisions within the context of an evolving decision-making framework.

In Decision-Making in a Dynamic Economic Setting, John Silvia, Chief Economist of Wells Fargo and one of the top 5 economic forecasters according to Bloomberg News and USA Today, skillfully puts this discipline in perspective.

  • Details realistic, decision-making approaches and applications under a broad set of economic scenarios
  • Analyzes monetary policy and addresses the impact of financial regulations
  • Examines business cycles and how to identify economic trends, how to deal with uncertainty and manage risk, the building blocks of growth, and strategies for innovation

Decision-Making in a Dynamic Economic Setting details the real-world application of economic principles and financial strategy in making better business decisions.

Preface xiii

Acknowledgments xvii


Dynamic Decision Making 1

Problems Change—Why Not Solutions? 3

Developing a Dynamic Decision-Making Process 7

Discussion Questions 19

Notes 21


Measuring Economic Benchmarks 23

Benchmarking Growth 24

Components of the GDP 27

Benchmarking Inflation: Pricing Power and the Cost of Goods Sold 36

Interest Rates: Real Nominal, the Short and Long End of It All 41

Exchange Rates: A Relative Price with Many Relatives 45

Profits 48

Unbiased Information: Biased Users 50

Discussion Questions 51

Notes 52

Recommended Reading for Serious Players 53


Cyclical and Structural Change 55

Forces of Economic Success 55

Cyclical Patterns, Linear Projections 57

Leading, Coincident, and Lagging Economic Indicators 59

Identifying Trends and Cycles 64

Bias in Decision Making 66

Cycles, Structural Change, and the Evolution of a Framework 73

Discussion Questions 78

Notes 79

Recommended Reading for Serious Players 80


Economic Dynamism: Growth and Overcoming the Limits of Geography 81

A Framework for Growth 83

Population Growth and the Westward Expansion of the United States 88

Institutions and the Savings/Investment Decision 90

Why Does Capital Not Flow to Poor Countries? 92

Overcoming Geography: Stretching the Production Possibilities Curve 92

The Competitive Implications of Altering the Exchange Rate 95

Growth, Opportunity, and Preservation 96

Discussion Questions 97

Notes 99

Recommended Reading for Serious Players 99


Information: Competitive Edge in the Twenty-First Century 101

Information in an Existing Business 102

Information as an Input to Today’s Competitive Advantage 103

Information in a New Growth Business 104

Information as Input to the Decision Process for Firms and Households 106

Three Steps of Information Processing for Decision Makers 107

Information in the Decision Maker’s Framework 116

Information as Part of the Business Model 117

Choices and Information Choke Points 119

Discussion Questions 119

Notes 121

Recommended Reading for Serious Players 122


Risk Modeling and Assessment 123

Economics and the Risk Modeling Process 124

Housing Prices: Deflation and the Shock to the American Psyche 129

Managing Economic Risk within the Decision-Making Process 132

Assessing Risks Using Econometric Models 138

Identifying Change 141

Principles for a New Model 153

Discussion Questions 155

Notes 157

Recommended Reading for Serious Players 158


Money, Interest Rates, and Financial Markets 159

Markets before Institutions 162

Markets: Interdependence and the Driving Force of Unexpected Events 162

Change and Putting Our Framework through Its Paces 166

Short-Run to Long-Run Adjustment 170

Quality Spreads, the Economic Cycle, and Accounting for Risk 172

Evolution of the Money, Inflation, and Interest Rate Framework 173

Lessons for Decision Makers 175

Discussion Questions 176

Notes 177

Recommended Reading for Serious Players 178


Strategy, Risk, Uncertainty, and the Role of Information 179

Four Levels of Strategic Thinking 180

Discussion Questions 197

Notes 198

Recommended Reading for Serious Players 198


Capital Markets: Financing Operations and Growth 199

Engine of Analysis: The Market for Real Capital and the Market for Funds 200

Perspective of Change over Time 201

Economic Change as Driver of an Evolving Capital Market Framework 203

Complex Interactions: Economics, Expectations, and Information 205

The 1980s: Another Decade, Another New Normal for the Financial Markets, and the Critical Role of the Recency Bias 208

Internal Cyclical Changes in Capital Markets and the Overconfidence Bias 210

Two Underappreciated Forces in Financial Markets Are Irony and Paradox 211

The Great Recession of 2007 to 2010: Under the Heading That Facts Don’t Matter until They Do 212

Economic Evolution and the Changing Risk/Reward Calculation 213

Price Dichotomy: Traded and Non-Traded Goods 215

Introducing the Wake-Up Call 216

Precise Mathematics Gives Way to Imprecise Reality: What Happens to Markets When the Average Expected Return and the Variability of Returns Become Uncertain? 217

Choices: Reacting to Feedback—The Most Dangerous Phase of the Credit Cycle 221

Credit Crunches: When Markets Don’t Clear 224

Capital Markets and the Life Cycle of an Institution 226

Capital Markets and the Allocation of Capital 230

Discussion Questions 232

Notes 233

Recommended Reading for Serious Players 235


Financial Ratios: The Intersection of Economics and Finance 237

Financial Ratios 237

Developing a Framework within a Broader Economic Setting 240

Financial Ratios as Information 248

Discussion Questions 267

Notes 268

Recommended Reading for Serious Players 270


Fiscal Policy as Agent of Change 271

Fiscal Policy over Time: Altering Incentives and Rewards of Risk Taking 272

Public Policy and Private Expectations—the Lucas Critique 284

Interdependence between Fiscal and Monetary Policy 285

Policy in the Context of Expectations and Information 289

Long-Run Equilibrium versus Short-Run Equilibrium 292

When the Long-Run Outlook Impacts Today’s Behavior 294

Political Business Cycle: Political Realities for Private Decision Makers 296

Fiscal Policy in an Open Economy: The United States in the Twenty-First Century 298

Discussion Questions 298

Notes 300

Recommended Reading for Serious Players 301


Global Capital Flows: Financing Growth, Creating Risk and Opportunity 303

Building a Framework for Understanding 304

A Model of Capital Flows to Frame Our Decisions 306

The American Framework in Global Capital Markets: The Evolution of Imbalances 313

Global Interest Rates 320

Risks and Opportunities: Not All Countries Fit One Mold 323

Implications for Decision Makers: Introducing Risk into the Global Capital Markets 328

Feedback, Altered Expectations, and Building the New Framework 330

A New Framework and the Overconfidence Bias 332

Discussion Questions 332

Notes 333

Recommended Reading for Serious Players 334


Innovation and Its Role in Economics and Decision Making 335

Innovation and the Economy 336

Innovation and the Patterns of Progress 349

Risk, Innovation, and Prospect Theory 352

Innovation, Economic Thought, and the Big Challenges of the Day 354

Discussion Questions 357

Notes 358

Recommended Reading for Serious Players 359


The Hodrick-Prescott Filter 361

Autoregressive Conditional Heteroscedasticity (ARCH) 365

About the Author 369

What’s on the Companion Web Site 370

Index 371