Global Economics

Dove or Turkey? A Strange Fight at the Minneapolis Fed


The long knives are out this Thanksgiving for the dovish head of the Federal Reserve Bank of Minneapolis. Narayana Kocherlakota has been an unorthodox, occasionally puzzling presence at Fed meetings in Washington ever since he was named president in October 2009.

Critics are appalled that the regional Fed bank is cutting ties with two of its best-known research economists without explanation. One theory is that Kocherlakota’s newly dovish views clash with those of the departing economists, who are staunchly “freshwater”—meaning they believe markets are largely efficient and are skeptical of government intervention. But with no official explanation, that’s just one guess.

Patrick Kehoe, who was a monetary adviser to the Minneapolis Fed since 1997, was fired by Kocherlakota on Oct. 18, according to Ellen McGrattan, also a monetary adviser at the bank. McGrattan told Bloomberg she plans to take a leave from the bank next year to accept an offer from the University of Minnesota. She pointedly noted that she wasn’t given a counteroffer by the bank.

This is big news in the clubby world of monetary economics, where critics of Kocherlakota have stopped just short of calling him a turkey. “Basically, Kocherlakota has declared war on his own research department, and seems intent on destroying the place as a research institution,” Stephen Williamson, a professor at Washington University of St. Louis who was a Minneapolis Fed economist from 1987 to 1989, wrote on his blog.

“It sends a bad message,” Edward Prescott, a Nobel Prize-winning economist at Arizona State University’s Carey School of Business who spends part of each year at the Minneapolis Fed, told the Minneapolis Star Tribune. “Something very good is breaking down rapidly.”

But more dovish economists said that the Minneapolis Fed research staff could stand some fresh ideas. “I do think that the monoculture they had developed was unhealthy—it did leave them completely unable to even think about the world post-2007 at all,” blogged Brad DeLong of the University of California at Berkeley.

Bloomberg reported Nov. 21 that the Minnneapolis Fed’s board of directors was standing behind Kocherlakota. Reading between the lines of the statement of support lends credence to the theory that Kocherlakota felt the research department was too uniformly doctrinaire. “Under his leadership,” the statement said, “the bank has significantly expanded the size of its research department, adding diversity in skills and perspectives.”

Kocherlakota is a native of Baltimore with a bachelor’s in math from Princeton and a Ph.D. in economics from the University of Chicago. He has been a nonvoting member of the rate-setting Federal Open Market Committee this year but cycles on as a voting member in 2014. As observed by the Wall Street Journal’s Real Time Economics blog, around 2012 Kocherlakota “went from thinking the cause [of high unemployment] was largely structural (and thus could not be fixed with monetary policy) to thinking it was largely due to weak demand (which means it could be addressed through policies aimed at boosting demand).”

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

Steve Ballmer, Power Forward
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