Areas of Expertise (9)
U.S. Federal Reserve
Economics of Money and Payments
Narayana Kocherlakota was the President and CEO of the Federal Reserve Bank of Minneapolis from 2009-2015. As part of his responsibilities in that position, he served on the Federal Open Market Committee (FOMC), the monetary policymaking arm of the Federal Reserve System.
His past research includes theoretical and empirical contributions to many fields in economics, including the economics of money and payments, business cycles, financial economics, public finance, and dynamic games/contracts. His current research is on monetary policy.
As a member of the FOMC, he spoke and wrote about a number of aspects of economic policy. As a professor, he intends to continue to write about economic policy.
Narayana Kocherlakota received a PhD in economics from The University of Chicago in 1987, under the guidance of Lars Peter Hansen and Jose Scheinkman (Rochester PhD and Lionel McKenzie student). Since that time, he has held academic appointments at a number of institutions, including Stanford University, Northwestern University, The University of Iowa, and the University of Minnesota.
The University of Chicago: Ph.D., Economics 1987
Princeton University: A.B., Mathematics 1983
- NBER : Research Associate
Selected Media Appearances (41)
Derby’s Take: Fed Nominee Judy Shelton’s Views Appear to Shift
Wall Street Journal online
Big switches by Fed officials are relatively rare. Two shifts in recent years came from current St. Louis Fed leader James Bullard, and Narayana Kocherlakota, who helmed the Minneapolis Fed between 2009 and 2015. Both men moved from being monetary policy hawks generally in favor of higher rates to becoming steadfast easy-money doves. It got them grief at the time they did it, but in retrospect their skepticism over the need for higher rates aged well.
Negative Rates: Economists Explain What Happens If The Fed Gives Trump What He Wants
The Federal Reserve is widely expected to keep interest rates unchanged in the 1.50% to 1.75% range when it concludes its committee meeting on Wednesday, despite President Trump’s plethora of recent calls for the U.S. to adopt negative interest rates. Chief critic: “To me, the evidence suggests that you are able to stimulate demand—households and businesses would borrow more to spend, though I don’t agree with the President that it’s a tool to roll out tomorrow afternoon,” says Narayana Kocherlakota, Professor of Economics at the University of Rochester and former president of the Minneapolis Fed (2009-2015). “I’m a big fan of negative rates—not at this moment in time, but it’s certainly something we should keep in the toolkit.”
[OP-ED] The Federal Debt Is Nothing to Lose Sleep Over
Policy makers and voters often express concern about the level of the federal deficit, which topped $1 trillion last year, and the national debt, now more than $23 trillion. But, unlike a household that owes money to a bank, the U.S. government has the ability to tax its creditors. This power means that the federal government can afford any level of debt that is owed to American taxpayers. Here’s an example of what I mean. Suppose that the government’s debt is $100 million per person -- a huge amount that is many times larger than the current debt -- and the interest rate is 5%. How can the government begin to pay this, a figure that amounts to $5 million per person per year? It’s actually simple.
2014 Fed conundrum: How to alert markets rates were going up
ABC News online
In her first year as Federal Reserve chair, Janet Yellen presided over a policy panel divided over the issue of how much longer the central bank could afford to keep its benchmark interest rate at a record low, and how to prepare financial markets for the start of rate hikes. According to transcripts of the Fed’s discussions released Friday, Yellen and the majority of the panel debated the reasons that inflation remained stubbornly below the Fed’s 2% target even as unemployment kept falling. By contrast, Narayana Kocherlakota, then head of the Minneapolis Fed, said by signaling possible rate hikes, the central bank was putting at risk the credibility of its stated goal of achieving 2% inflation.
Fed's 2014 'normalization' debate sowed seeds for today's hot labor market
By late 2014, U.S. central bankers knew the crisis-driven era of near-zero interest rates might be about to end and that they could within weeks approve the first U.S. rate hike in eight years. Back in 2014 only a few argued that lower unemployment should take priority until inflation actually became a problem. “No one is going to complain to the Federal Reserve ‘You’ve created way too many jobs. Stop creating so many jobs,’” former Minneapolis Federal Reserve Bank President Narayana Kocherlakota said at the December policy meeting.
Powell Was Early Spotting Labor-Market Slack, Transcript Shows
Jerome Powell was an early adopter of the view that U.S. unemployment could fall further than thought, but back then didn’t parlay that insight into a more dovish stance on interest rates. Not all on the committee were so reluctant to try a more aggressively dovish rates policy. Narayana Kocherlakota, then president of the Minneapolis Fed, consistently warned about subdued inflation and the possibility it could cause inflation expectations to slide down, a reality the Fed is dealing with now. Low inflation expectations can drag inflation down even further below target and leave the central bank with less room to fight a recession. “I am concerned that failing to react to the ongoing subdued inflation outlook has begun to create significant downside risks to the credibility of that target,” Kocherlakota said in the October 2014 FOMC meeting.
5 major themes from this year's largest gathering of economists
Every January, thousands of economists from all over the world convene in one convention center to share their research on topics ranging from health epidemics to machine learning. Yahoo Finance was on-site in San Diego for the conference and highlights, which revealed five big topics that could be game-changers for the field of economics. Former Minneapolis Fed President Narayana Kocherlakota told Yahoo Finance in an interview that Congress should be willing to spend amid low borrowing costs on U.S. government debt.
[OP-ED] Five Big Macroeconomic Questions for 2020 and Beyond
As a new decade begins, I see five big questions facing macroeconomists, which I’ve listed in a roughly increasing order of difficulty. Why not make full use of our productive resources? Inflation has been stuck below the Federal Reserve’s target of 2% for much of the past decade. It is expected to remain low for at least another year or two. The low rate of price increases is sending a clear message: there’s too little demand for goods and services relative to the supply of resources — especially human resources! — that can be used to produce those goods and services. So, why doesn’t the Fed respond to low inflation by easing monetary policy so as to boost demand, and make use of available supply?
The Fed Has Been ‘Highly Ineffective’ At Steering Economy, Former Top Official Says
A former top Federal Reserve official says the central bank appears not to have learned key lessons from the Great Recession, including how its halting embrace of aggressive monetary policy left the economy short of both its inflation and employment goals for too long. As the Fed meets Wednesday to consider both changes to interest rates—not expected after three recent cuts—and broader changes to its policy framework, Narayana Kocherlakota, former Minneapolis Fed president and now a professor at the University of Rochester, is “quite worried about where it seems likely to end up.” In a Q&A published by the university, Kocherlakota says Fed officials appear too comfortable with the current rules of the road despite their record of undershooting both their inflation and employment targets for much of the economic expansion.
Here's the single phrase to watch for from the Fed this week
ABC News online
WASHINGTON -- Economists and investors who are trying to get a fix on what the Federal Reserve may do in the months ahead have zeroed in on a single phrase in the statement it has issued after its most recent policy meetings. The phrase seems innocuous enough. The Fed's policymakers, it states, "will act as appropriate to sustain the expansion." Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis and now an economics professor at the University of Rochester, said he thinks the Fed will want to keep its options open. Though the economy appears mostly healthy, inflation remains below the Fed's 2% target and Americans increasingly expect inflation to stay unusually low. Further cuts could help lift inflation toward the Fed's target, Kocherlakota argues. "I suspect we won't know much about what they'll do in December," he said. "They're going to be very balanced in their communication."
Newsletter: Get Ready for the Fed, GDP and Jobs
Wall Street Journal
This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here. Buckle up. This week is a triple header of major economic news in the U.S.: the first read of third-quarter economic growth, a policy statement from the Federal Reserve and October’s jobs report. Former Minneapolis Fed President Narayana Kocherlakota says the central bank is going to cut again this week. "The thing I feel some certainty about is that the Fed will announce another quarter percentage point cut in its target interest rate. ... The big question, though, is what will they say to tip their hand about December, which will be the final meeting of the year? The Fed will keep its options open in its statement for December," the University of Rochester professor says in a Q&A.
Kocherlakota: Wealth taxes pose a risk to economic growth
Former Minneapolis Federal Reserve President Narayana Kocherlakota on the U.S. employment picture, tax reform and the Fed’s next move.
Powell Could Still Get a Rate Cut If He Wanted It — No Matter What the Dot Plot Says
The Federal Reserve’s “dot plot” of interest-rate projections shows plenty of disagreement among central bankers over where monetary policy should go in the next three months. That doesn’t mean Chairman Jerome Powell will have trouble corralling his colleagues into a another cut in 2019, if that’s ultimately what he wants. “The dot plot is a very, very imperfect way to understand what’s going on in the committee,” said Narayana Kocherlakota, former president of the Minneapolis Fed and now an economics professor at the University of Rochester. Engineering another 2019 cut “is well within Powell’s ability if he were inclined to make it happen.”
Repo Meltdown Shows Budget Deficit Has Limits
The repo market madness lives on for a ninth day. The Federal Reserve Bank of New York announced Wednesday that it would increase the size of its next overnight system repurchase agreement operation to a $100 billion maximum, from $75 billion previously, and also raise the limit on its 14-day term repo operation to $60 billion from $30 billion. Simply put, the bank wants to flood the funding market with enough cash to soak up all the securities that dealers submit 1 and leave no doubt that the critical financial-system plumbing is in fine working order ahead of the end of the quarter. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said that the banks “have a tremendous amount of liquidity but also have a tremendous amount of restraints on how they use that liquidity.” As former Minneapolis Fed President Narayana Kocherlakota wrote for Bloomberg Opinion, requirements like holding a certain amount of liquid assets and maintaining a minimum leverage ratio, which sound perfectly reasonable in theory, can distort lending and borrowing in unforeseen ways.
[OP-ED] Why I'm Worried About the Repo Market
The recent unrest in money markets, which briefly caused short-term interest rates to get out of the Federal Reserve’s control, won’t undermine the central bank’s ability to achieve its longer-term economic goals. That said, it does signal that something’s very wrong with the financial system. To understand what’s going on, let’s return to a simple model. Suppose there’s only one big bank. It has a choice of what to do with most of its assets: It can keep them on deposit at the Fed, earning the interest rate that the central bank pays on excess reserves; or it can take more risk and earn more return by investing in securities or loans. In this world, all the assets earn the same “risk-adjusted” return, which the Fed effectively determines by setting the interest rates on excess reserves.
Trump's attacks on the Fed are moving markets, study shows
Trump has persistently scolded Federal Reserve Chairman Jerome Powell for aggressively raising interest rates last year. The president has compared Powell to a "golfer who can't putt" and even suggested his handpicked Fed chief is a "bigger enemy" than Chinese President Xi Jinping. "This president wants to have a scapegoat if the economy goes badly. He's preparing that case for his voters," Narayana Kocherlakota, the former president of the Minneapolis Fed, told CNN Business.
'Bloomberg Markets: The Close' Full Show (9/18/2019)
Scarlet Fu and Tom Keene host Bloomberg's special coverage of the announcement of the Fed rate decision and Chairman Powell's remarks. Then, Scarlet Fu, Caroline Hyde & Romaine Bostick bring you the latest news and analysis leading up to the final minutes and seconds before the closing bell on Wall Street. Guests Today: Scott Minerd of Guggenheim, Jeffrey Rosenburg of BlackRock Financial, Fmr. Minneapolis Fed President Narayana Kocherlakota, Peter Conti-Brown of Wharton School of Business, Andrew Levin of Dartmouth College, Kirk Hartman of Wells Fargo
Fmr. Fed president Kocherlakota: Dudley’s ‘dial back’ in op-ed didn’t dial back enough
Sarah Bloom Raskin, former Fed governor, and Narayana Kocherlakota, former Minneapolis Fed president, join CNBC’s “Closing Bell” to discuss former New York Fed President Bill Dudley’s op-ed clarification
[OP-ED] How Presidents Should Talk About the Fed
Donald Trump’s persistent attacks on the Federal Reserve raise an important question: What should and shouldn’t presidents say about the central bank? The key is to understand the difference between the concepts of independence and accountability. It’s crucial that the Fed enjoy independence from elected officials in deciding how to pursue the goals that Congress set out for it -- stable prices and maximum employment. This freedom ensures that the central bank is seen as trying to achieve the best long-term economic outcome, as opposed to working for the re-election of a particular president. President Trump has threatened this perception of independence with his frequent tweets about where the Fed should set interest rates.
U.S. economy is ‘relatively strong’ and doesn’t need lower interest rates, key Fed leader says
The Washington Post online
Narayana Kocherlakota, the former head of the Minneapolis Fed from 2009 to 2015, has been one of the most outspoken voices calling for interest rate cuts, but even he said he probably would not endorse more than a small cut in September. Going lower could spook business leaders and investors, he said. “If I were sitting in that room, I’d be pretty loathe to cut 50 basis points,” said Kocherlakota, who is now an economics professor at the University of Rochester. “There is a risk if you do cut by 50 basis points, you’re sending a message that we see something really bad on the horizon.”
[Op-Ed] What the Fed Could Learn From Canada
Bloomberg Opinion online
The U.S. Federal Reserve has developed a pretty poor track record for meeting its inflation and employment goals. If it wants to do a better job, it should follow Canada’s example and set some deadlines. More than four decades ago, Congress mandated that the Fed’s monetary policy pursue two objectives: price stability and maximum employment. In January 2012, the central bank clarified the former by adopting a 2% target for its preferred measure of inflation (the price index for personal consumption expenditures). For more than seven years, it has systematically undershot that goal.
Economics professor: There's an argument for more easing
Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, says he believes the Federal Reserve will ease more by cutting rates during 2019.
Dow drops for the first time in 4 days—here’s what experts see ahead for markets
Former Minneapolis Fed President Narayana Kocherlakota warned of a debilitating “fear factor” weighing on global markets: “I think the concern that you see in bond markets about the future is really tied to the lack of policy capacity that we have in central banks, that we’re going to see these downside shocks and central banks and the fiscal authorities are not going to be able to respond effectively. And that’s going to lead to another recession, perhaps of the magnitude we saw in — hopefully not, but could lead to a recession the kind of magnitude we saw in 2007 to 2009, with those same kind of persistent effects on output. And that’s because it’s the fear itself … of low capacity that breeds the conditions where, actually, central banks can’t respond effectively. So, that’s what worries me, and that’s why I think we have these low nominal rates around the world. ... You look at German debt, for example, out to 10 years at negative nominal yields — this is all a fear factor, and we need to have better expectations of growth. I’m not sure where that’s going to come from, though.”
Former Fed official Kocherlakota agrees with Trump that rates are too high
Former Minneapolis Fed President Narayana Kocherlakota voiced agreement Tuesday with President Donald Trump’s contention that interest rates are too high. While he expressed some reservations about the impact a sitting president’s criticism could have on Fed independence, Kocherlakota said the notion that monetary policy is too restrictive is basically correct. “I agree with the president on the economics,” he said during an interview on CNBC’s “Squawk Box.” “I think maybe not the 100 basis points [cut] that he mentioned yesterday, but in general I think the Fed has been too tight.”
Widely Anticipated Fed Rate Cut May Backfire For Stock Market Bulls
The Federal Reserve is widely expected to cut interest rates by 25 basis points Wednesday afternoon, and conventional economic wisdom suggests that will cause stocks to rise. But conventional wisdom hasn't reflected reality the last two times the Fed ended a period of tightening with a rate cut. “A quarter percentage point will be a disappointment to some investors, which could result in a small downward blip in the market,” University of Rochester economics professor and former president of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota said in a Q&A last week. “It's all, as we like to say in monetary circles, baked in the cake. If the Fed were not to cut interest rates, then you would see a very sharp fall in the stock market.”
Possible dissent hangs over Fed's first rate cut in a decade
Business Insider online
The fact that such a situation does not trigger a number of dissents suggests the entire Fed has shifted, according to Crosby Kemper III, the executive director of the Kansas City Public Library and a former banker who touted George’s inflation-fighting credentials in a wide-ranging public interview with her in February. A dissent would go a long way to convincing investors the Fed hasn't forgotten about the threat posed by inflation, said University of Rochester economics professor Narayana Kocherlakota, who dissented several times when he was Minneapolis Fed president. "I do hope that there is a dissent next week that goes on record as opposing the (Fed's expected) 25-basis-point cut," said Kocherlakota. "The Fed has become more 'dovish' - it seems more willing to court higher inflation in 2019 than in 2015, even though it's clearly doing better on the employment mandate."
The U.K. Is Split, Barnard Says
Bloomberg Surveillance (podcast) online
Narayana Kocherlakota, Bloomberg View Columnist & former Minneapolis Fed President, says Fed Chairman Jerome Powell has proven himself to be a consensus builder. (16:15) Narayana Kocherlakota acclaimed at Minnesota and now at the University of Rochester joins us.
The Fed Has Reached a Turning Point
By Narayana Kocherlakota The U.S. Federal Reserve is poised to put interest rates on a new, downward trajectory in its efforts to support an increasingly fragile economy. The move is long overdue, but it's crucial that officials and the public recognize the risks. Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
Why the Fed Shouldn't Cut Interest Rates Now
Bloomberg Opinion online
By Narayana Kocherlakota The outlook for the U.S. economy has recently darkened, with worries about trade wars and consumer demand weighing on overall confidence. As a result, many observers -- including me -- are expecting the U.S. Federal Reserve to provide some stimulus, by lowering interest rates as much as half a percentage point over the next few months. Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
Why Stephen Moore Isn't Fit for the Fed
The U.S. Federal Reserve's success in managing the economy depends crucially on its ability to conduct monetary policy without political interference. It's thus good news that President Donald Trump won't be appointing economic commentator Stephen Moore to one of the two open positions on the Fed's Board of Governors. There's ample reason to believe that doing so would have jeopardized the central bank's independence. Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
Modern Monetary Theory Finds an Embrace in an Unexpected Place: Wall Street
New York Times print
Narayana Kocherlakota, the Lionel W. McKenzie Professor of Economics, said that compared to those within the Fed, chief executives, financiers, and analysts who operate internationally tend to be more open to modern monetary theory in their analyses of government deficits and inflation. “Folks who take a global perspective are much more likely to see a lot of unused capacity.” They realize “inflation is not built at home anymore, it’s built through global pressures.”
Feds Should Cut Interest Rate
Narayana Kocherlakota, former president of the Minneapolis Federal Reserve Bank, discusses the Fed's upcoming policy meeting.
The Fed Should Consider Lowering Rates
Nobody is expecting any major news from this week’s policy-making meeting at the Federal Reserve. That’s unfortunate, because the Fed should be considering more stimulus for a U.S. economy that has long failed to meet its goals for employment and inflation. In January 2012, the central bank set an explicit inflation target of 2 percent. In the subsequent seven years, its preferred measure of consumer prices — the Commerce Department’s price index for personal consumption expenditures, excluding food and energy — has consistently fallen short of that target.
The Fed Should Prepare For The Unexpected
Bloomberg Quint online
Officials at the U.S. Federal Reserve are grappling with an important issue: how to deal with the possibility that the economy doesn’t act the way they expect it to. Judging from their analyses, different risks will require different responses — and at least one concern isn’t getting enough attention.
Fed's Path Should Be Lower, Slower on Yield Curve, Kocherlakota Says
Bloomberg Daybreak: Americas online
Narayana Kocherlakota, former Minneapolis Fed President and a Bloomberg Opinion columnist, examines the yield curve and its impact on the Federal Reserve's rate path. He speaks on "Bloomberg Daybreak: Americas." His opinions are his own. (Source: Bloomberg)
Fed More Likely to Hike to Prove Independence, Says Kocherlakota
University of Rochester Professor and Bloomberg Opinion Columnist Narayana Kocherlakota weighs-in on President Donald Trump's comments about Federal Reserve monetary policy and Federal Reserve Chairman Jerome Powell's message to Congress earlier this week. He speaks on "Bloomberg Daybreak: Americas." His opinions are his own.
Barriers to entry
The Economist online
SCIENCE is supposed to be the ultimate meritocracy. People might sneer at a thinker’s background or training, but there can be no arguing with a powerful new idea which explains the world better than its rivals do. In reality, academia is cluttered with odd cultures and practices which serve as barriers to entry—and, at times, as cover for discrimination. In economics, men receive tenure at a rate 12 percentage points higher than women do, after controlling for family circumstances and publication records. Women who clear that hurdle are about half as likely as men to be named full professor within seven years. Just 4% of doctoral degrees in economics were awarded to African-Americans in 2011 (compared with about 8% across all academic fields). Something is broken within the market for economists, and the profession has moved only belatedly and partially to address it. A lack of inclusivity is not simply a problem in itself but a contributor to other troubles within the field.
President Trump Says Jerome Powell Is His Choice to Lead Federal Reserve
Wall Street Journal print
Former Minneapolis Fed leader Narayana Kocherlakota, who worked with Ms. Yellen and Mr. Powell before leaving the central bank in 2015, said he would have preferred a Yellen renomination but he sees Mr. Powell as an excellent choice. The University of Rochester economics professor said Mr. Powell is “deeply knowledgeable about the workings of the Federal Reserve, and deeply committed to its public service mission.”
Kocherlakota says Fed shouldn’t hike rates in June — and it should grow, not cut, the balance sheet
In his six years as president of the Minneapolis Federal Reserve, Narayana Kocherlakota became famous for his most unusual transformation from a leading hawk to the biggest dove on the central bank’s policy committee.
Negative Interest Rates Are Nothing to Fear
The world's central banks are increasingly employing a controversial method to stimulate economic growth: negative interest rates. I'm convinced that this can be a valuable tool, but its power depends a lot on how it's used.
[OP-ED] Trump’s Fed Nominees Will Mean Easier Money
There are two vacancies on the Federal Reserve Board of Governors. President Donald Trump has nominated monetary policy experts Judy Shelton and Christopher Waller to fill them, subject to confirmation by the U.S. Senate. The president picked Shelton and Waller because they are seen as favoring easier monetary policy. As governors, how would the views of Shelton and Waller affect the Fed’s choices?
Selected Event Appearances (5)
ADBI Annual Conference Tokyo, Japan
Asia Economic Policy Conference Federal Reserve Bank of San Francisco
Vanderbilt University Nashville, TN
Duke-UNC Asset Pricing Conference Durham, NC
Midwest Economics Association Evanston, IL
Selected Articles (5)
The future of the zero lower bound problemJournal of International Money and Finance
2018 Thanks for the generous introduction. I also want to thank the organizers for their invitation to address you tonight. I view it as a huge honor to give a keynote address at this prestigious conference at one of my favorite research institutions. My subject is a natural one given our venue. In August 2016, John Williams, President of the Federal Reserve Bank of San Francisco, released a public statement1 emphasizing, and I quote, ‘‘the need to study and consider new approaches to fiscal and monetary policy.” My speech today is entitled, ‘‘The Future of the Zero Lower Bound Problem,” and should be viewed as a response to John’s call to action. During the first part of my speech, I’ll answer John’s call much as a policymaker would – viewing the zero lower bound problem as a largely technical consideration that the Fed and others must try to surmount as best they can. During the second part of my speech, I’ll answer John’s call more as an academic: by describing a simple and direct, but largely politically infeasible, approach to solving the problem.
Practical Policy EvaluationNational Bureau of Economic Research
2018 In the wake of the Lucas Critique, the study of appropriate macroeconomic policy has largely focused on the comparison of different regimes/rules. In practice, few policymakers are faced with making those kinds of choices. In this paper, I examine the problem of a policymaker making but one in a long sequence of similar decisions (like to raise or cut interest rates by a quarter percentage point). I model the policymaker as playing a dynamic game against a forwardlooking private sector. My main result is that, under relatively weak conditions, the policymaker's optimal within-equilibrium response to the current state can be found by applying statistical regression methods to past macroeconomic data. Theory is only useful as a source of information about credible functional form restrictions on these regressions. Based on this result, I argue that macroeconomic policy evaluation intended to be of practical value should rely considerably less on putatively structural macroeconomic models and considerably more on regression-based approaches.
The Decentralized Central Bank: A Review Essay on The Power and Independence of the Federal Reserve by Peter Conti-BrownJournal of Economic Literature
2017 This essay discusses the structure and governance of the Federal Reserve System in light of the many changes in its activities over the past thirty years. Based on this analysis, it argues in favor of four specific reforms: clarification of Congressional expectations for the system; enhanced Federal Reserve Board of Governors transparency with respect to its oversight of the Reserve Banks; stripping monetary-policy votes from the President of the Federal Reserve Bank of New York and the Boards of Directors of the Reserve Banks; and the initiation of a public conversation about redesigning the Federal Reserve as a unified public entity.
The L-Shaped Phillips Curve: Theoretical Justification and Empirical ImplicationsNational Bureau of Economic Research
2017 This paper has two parts. In the first part, I demonstrate that, in the absence of price and wage bounds, monetary models do not have current equilibria - and so lack predictive content - for a wide range of possible policy rules and/or beliefs about future equilibrium outcomes. This non-existence problem disappears in models in which firms face (arbitrarily loose) finite upper bounds on prices or positive lower bonds on nominal wages. In the second part, I study the properties of a class of dynamic monetary models with these kinds of bounds on prices/wages. Among other results, I show that these models imply that the Phillips curve is L-shaped, are consistent with the existence of permanently inefficiently low output (secular stagnation), and do not imply that forward guidance is surprisingly effective. I show too that economies with lower nominal wage floors have even worse equilibrium outcomes in welfare terms. It follows that models with arbitrarily low but positive nominal wage floors are not well approximated by models without wage floors.
Rules versus Discretion: A ReconsiderationBrookings Papers on Economic Activity
2016 In this paper, I evaluate the relative merits of rules versus discretion in making monetary policy, from both empirical and theoretical perspectives. Empirically, I argue that in the 2009–10 period, the Federal Open Market Committee aimed for a slow recovery, in large part because its judgments about appropriate monetary policy were unduly influenced by the Taylor rule (which was seen as a good approximation of its pre-2007 reaction function). Theoretically, I use the delegation framework of Bengt Holmström (1984) to show that, as long as the central bank’s inflation bias is sufficiently small, it is socially desirable to give the central bank discretion so that it can respond effectively to inflation shocks that cannot be encoded into predetermined rules.