A Teaching Note on Barro's (2005) "Rare Events and the Equity Premium" and Rietz's (1988) "The Equity Premium: A Solution"

Should-Read: Pedro Nicolaci da Costa: Ex-Bank of England official says Fed has wrong idea on jobs, inflation: "The Fed's misleading view of the job market reflects 'a huge intellectual failure'... http://www.businessinsider.com/ex-bank-of-england-official-says-fed-has-wrong-idea-on-jobs-inflation-2017-7

...That's the view of David Blanchflower.... "Prior to 2008, the unemployment rate was a sufficient statistic to tell you about the labor market," Blanchflower said. "The employment rate was mirror image." Today, however, "a cyclical decline in demand means the unemployment rate has fallen but the employment rate has not recovered to precrisis levels," he said. In other words, the economy is still too weak to sustain full employment, and policymakers are not doing enough about it. Explaining the gap are high levels of long-term unemployment and severe underemployment, in addition to persistent racial disparities in job availability and incomes....

"This is a huge intellectual failure," said Blanchflower.... The same inflation hawks within and outside the central bank have been warning about imminent inflation for years, Blanchflower said, only to be proved wrong time and again: "It's really here, it's really coming, it's really coming, inflation is right around the corner." Indeed, it never has. US inflation continues to undershoot the Fed's 2% target, and it is in fact moving further below it, despite a low headline jobless rate. This suggests there's much room for improvement yet, something most jobseekers would attest to.