Monday, November 18, 2013

Problems in the Great White North

You think I'm going to discuss the mess the Mayor of Toronto is making in his city, and the embarrassment faced by those of us who have an attachment to the place? Actually, the problem I'm going to focus on is located in Minneapolis - otherwise known as Toronto On a Bad Day. The Minneapolis fracas has some parallels to the Toronto fracas, with the exception being that the Minneapolis folks are clean-living and free of substance-abuse and anger-management issues.

What happens at a regional Federal Reserve Bank? A strength of the Federal Reserve System is that the regional Feds are more or less independent of the Board of Governors in Washington. A Fed President is appointed by the the Bank's Board of Directors, with approval by the Board of Governors, and he or she can shape policy ideas, with the help of staff economists, that compete with the ideas at the Board, and those coming from the other regional Feds. When the Federal Open Market Committee (FOMC) meets, those potentially disparate ideas come together, and if the system works as it should, then the resulting policy decisions are arguably superior to the ones that come out of the centralized central banks that exist in most countries outside the U.S.

But, to shape good policy ideas, a regional Fed President needs advice from serious economists who are up to speed, if not at the frontier, of research in their fields. The most efficient way for economists to stay current is for them to carry on research projects and subject the resulting research to peer review in academic economics journals. Indeed, since the 1970s, Research Departments at Federal Reserve Banks have improved to the point where they can compete successfully for leading economic researchers, and can hold those economists to standards that are comparable to those in leading research universities.

The Federal Reserve Bank of Minneapolis was a leader in bringing cutting edge macroeconomic research into contact with monetary policymaking. Beginning in the early 1970s, the Bank created a relationship with the University of Minnesota. The Bank could provide resources to support research in exchange for the ideas of top academics, those top people would help the Bank to attract other top researchers to serve as full-time economists in the Bank's research department, and the whole research operation could be much better than the sum of its parts. Under the leadership of people like Gary Stern (President from 1985-2009), Art Rolnick, and Warren Weber, research at the Bank flourished - indeed, it was revolutionary. Four people (or more, depending how you count) associated in various ways with the Bank now have Nobel prizes in economics.

A concern at the Minneapolis Fed, just as in any research institution, was what would happen when the management changed. In 2009, with Gary Stern and Art Rolnick retiring, who would run the place? By the fall of 2009, information about who the candidates were had leaked out, and I think there was a collective sigh of relief. In early October of 2009, I went to a conference at the University of Toronto, and Narayana Kocherlakota was there. One night, we had dinner with Narayana, who we knew might be appointed, and we asked him why he wanted to do it. For Narayana, this was a very non-obvious career move. Academics, and Narayana in particular, are looking for intellectual stimulation, and that can't always be had when you're giving speeches to the Rotary Club (no offense to the Rotary Club). Further, academics at the top of the heap typically get somewhat better salaries than do Fed officials. What Narayana said to us in Toronto in early October 2009 was something like: "These are interesting and trying times, and I think I have something to contribute." His primary interest seemed to be having an influence in Washington. In any case, Narayana was appointed as Minneapolis Fed President during the following week.

So, how has that worked out? I discussed some of the issues in a previous post, where I was primarily concerned with Narayana's views on monetary policy. Unfortunately, there's a deeper story here about the health and future of the Minneapolis Fed as a policy institution. In the last weeks, the place has been in turmoil. The internal leadership has been shaken up, and top researchers have been explicitly and implicitly shown the door. All of this has occurred with little warning, or context. The President has done little to articulate a vision for the Minneapolis Fed as a research institution, or a direction for its future. Kocherlakota's interaction with all but a tight inner circle of policy advisers has been reduced to nil, and the top researchers have been made to understand that their input in the policymaking process is not wanted.

Basically, Kocherlakota has declared war on his own research department, and seems intent on destroying the place as a research institution. If this were part of some well-articulated plan or in service of some greater good, maybe we could be convinced, but neither appears to be the case. If the greater good is supposed to be better policy, then it seems that many sharp macroeconomists beg to differ.

So, what's to be done? Like the Mayor of Toronto, Narayana Kocherlakota seems locked in his own bubble. The Mayor of Toronto doesn't seem good for much of anything. He should do the world a favor, resign, and go live as far away from other human beings as possible. Narayana, though, is indeed good for something. He was an excellent academic, and a fine colleague when I worked with him. There are plenty of first rate academic research departments that would be happy to give him a good home. Central banking, however, is not his calling, and he should quit - and do everyone, including himself, a favor.




151 comments:

  1. So have there been any other episodes of "turmoil" in research departments at the Fed ? Like when New Classical challenged OKs in the 70s ?

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    1. I don't know of any. I'm not sure if the turmoil in this case really has much to do with basic ideas about what good research is.

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  2. I find it incredibly unlikely that Narayana started this thing on his own. Takes two to tango.

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    1. It's true that you can't have a fight without sides being taken. I think it's fair to say that he made the first move, though.

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    2. Question for Stephen: Did these "top researchers" warn of a coming hyperinflation that didn't pan out? It appears as though they were repremanded for poor research.

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    3. http://ideas.repec.org/top/top.person.all.html#pke4

      http://ideas.repec.org/top/top.person.all.html#pmc46

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  3. Stephen - do you know if this is because NK/his advisors have lost faith in what Krugman would call "freshwater" macro for policy analysis? Or are there other reasons?

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    1. "Freshwater" applies to something that was going on in the 1970s. NK, i.e. New Keynesianism, you can think of as some kind of hybrid. NK (Kocherlakota) seems to want to talk about policy in terms of NK (New Keynesianism). That doesn't represent a loss of faith in something - I think that's just a decision based on communication with the rest of the Fed system. I could be wrong, but I think that Kocherlakota could avoid conflicts within the Bank, get good policy advice, and say whatever he wants to the FOMC. Big deal if there are some disagreements about what policies are right.

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  4. There are some awfully big egos in Minnesota. The current stock of people, while very good, are a very far cry from Prescott, Sargent, Sims and Wallace in caliber. They are not as socially minded either. It is probably the end of an era. It will be up to places like St Louis to carry the torch.

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    1. Well, I'm glad you think well of us. I'm not sure what to say about the first three sentences, other than that you could find people who would argue about the details.

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  5. I don't see the big deal. NK recognized these researchers had a previously unnoticed preference for leisure and decided to help his bros out.

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    1. This is the best reply anyone's ever given a freshwater economist.

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    2. I also bet that Kehoe or McGrattan are not going to feel any financial pinch because idiosyncratic risk can be diversified in complete markets by trading on Arrow-Debreu securities.

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  6. Yes, in the old days there were tremendous rapport between the bank and the University. But the bank has taken over the University since then. Graduate students, who survive with teaching assisantship, have to teach for the professors while the latter can hide themselves at the bank.

    Besides, I don't really believe the researches being done for those people who have been explicitly and implicitly shown the door have anything relevant to the actual policy making.

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  7. Depends what you mean by relevant, for example:

    http://www.minneapolisfed.org/research/wp/wp664.pdf

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    1. I don't see the relevance. It is one hand-picked calibration. This approach basically ignores all the advances in quantitative methods of the last 20 years (including at least 3 Nobel prizes).
      At a deeper level, pointing flaws in other people's research is not progress is regress! They badly lost the VAR debate but they keep trying to destroy other research agendas. It seems this came to an end thanks to one of their own.

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  8. While I am an admirer of both Narayana and the people at the bank, I do think that the Fed has turned into a net negative for the University. If you walk down the halls of the economics department, you seldom see the macro faculty who are being paid hundreds of thousands per year to teach at the U. The teaching of undergraduates is a disgrace to the institution. The faculty seem to think they are above the normal university duties of teaching e.g. a many hundred person undergraduate couse is typically staffed by a graduate student. The typical undergraduate never sees a faculty member in a course. Also, faculty are seldom available for graduate students that are not at the Fed. While it may be a loss to the Fed and the research community, one can only hope that the most prominent senior faculty at Minnesota will begin to take their university jobs seriously. It really can't get much worse than the current state of affairs.

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    1. Agree completely

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    2. Can't agree more.
      I was just wondering will there be a problem if the Dean or even the State Congressman visit the department without notice during the semester and find out almost all macro faculty is not there.

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    3. As a result of low teaching loads and the availability of various visiting deals, this problem is not unique to Minnesota.

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  9. Yes, that's definitely an important cost of that research model.

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  10. It would be interesting to hear from the people involved on the side of the research department if they thought there was nothing at all that triggered showing to the door, perhaps, they could find a thing or two that did... I disagree with Rob Ford comparison rather strongly, it does not belong here....

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    1. That's just my attempt to throw some humor in to try to relieve the tension.

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  11. I have serious doubts that this blog post would resolve anything or help the situation in any way... I don't think angry rant ever did, and it undermines the blog's points that do have the rationale...

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    1. I have serious doubts too. But what the heck.

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    2. oh look at all smug high and mighty pious Mr.Tartuffe at 9.05.

      Lighten up, twit. Its all bloody good fun.

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    3. I would prefer to watch a boxing match, then punches thrown by heavy-weight economists... but surely, it is all bloody good fun...

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    4. Ask Kei Mu, Pat, or Ellen if they're having fun. I don't think so.

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  12. An honest question- what recent research by the research department do you think would be most informative on very practical monetary policy problems. E.g. measuring the impact (if any) of QE on real economic output, how the Fed should manage its balance sheet or other tactical problems.

    To be clear, I am fans of the research department and Narayana. I've seen them present and thought highly of them as scholars. However, it is unclear to me if they can answer tactical policy questions that he needs to take a position on in the short term.

    I do love the part of the Minnesota/Chicago view that points out that we do need to pay attention to the long run (I had the opportunity to learn macro from some of these guys in grad school although I was not a macro). Hence, if we create inefficient regulations or barriers to growth that our basic competitive model would predict generates inefficiencies, this will harm growth in the long run. Also, I agree with their view that no one has articulated clear and compelling mechanisms for the effectiveness of short run Keynesian policies.

    That said, I suspect that these insights have somewhat limited use in making decisions around the questions he faces at the board.

    Not taking a hard stance on any of this- just curious about your perspective.

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    1. Well, one thing I could say is that, at one time, there was a group of people at the U. and at the Bank in Minneapolis who thought about monetary economics and banking. Narayana dabbled in that from time to time. But that part of the research agenda drifted off. Of course New Keynesians neglected it too, so Minneapolis isn't alone on that front. I haven't really seen much in the way of research anywhere in the Fed system, for example, that seriously addresses the "measurement of the impact of QE on real economic output."

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  13. To make an impact, you need to play the game under the established rules. Meaning, monetary policy is discussed with a well-defined model. Unfortunately, in spite of all the smart people in MN, none of them were playing the New Keynesian game (or even have and M or P in their models). Only kings during the dark ages could afford orthogonal advisers. Kocherlakota realized this early on and took action. Whether people like or not, the NK paradigm is the only quantitatively relevant apparatus to study monetary policy. Until a new data-friendly paradigm emerges, I don't see how this is going to change.

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    1. The only approach isn't to buy into what everyone else is doing. How do you think "data-friendly paradigms" emerge? Someone has to take the initiative and a be a leader, instead of following the crowd.

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    2. Well, I have been studying lately the New Monetarism framework advanced by Steve (and Wright, and others) and I disagree with you. I think it is more promising than the New Keynesian paradigm. Granted, being at its infancy, the paradigm is still far from delivering quantitative predictions. However, it certainly deserves more attention.

      After much thought, I have come to the conclusion that recessions are, to a large extend, break-downs in trade. And yet trade is the one thing not explicitly modeled in most macro models (New-Keynesian or New Classical). I think Steve's work tries to address this weakness, so I hope more research papers that use this framework will emerge in the future.

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    3. Difference between academics and practitioner is that the former can dream the latter has to be pragmatic. No time to take jumps of faith to untested waters. Hopefully, new theories well be at their prime for next crisis. For this one, policymakers made their choice.

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    4. Unfortunately, the choice that a lot of policymakers took before the financial crisis was to go with a model - the NK model - that had no role for monetary exchange, credit, banking, collateral, etc. Seemingly a bad choice, don't you think?

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  14. I have never understood why central banks would outsource their performance appraisal system by insisting their staff publish in journals and therefore get judged by academics. The real test of a central bank's success is the policy outcome. The Minnesota Fed has no influence on the policy process and is basically ignored by other central banks, especially overseas. The real influence in the fed system is in Washington at the Board and in New York. The rest of them, except maybe SF, have no international standing. Most of the most successful central banks (Bank of Canada, RBA, MAS etc) don't care if their staff publish in journals and structure their research work to support their policy efforts. Minnesota Fed is usually seen by real central bankers with policy responsibilities as a bunch of cranks. Frankly it is an indulgence to have that many people pursuing their own research without having to be responsible to the policy process.

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    1. "The Minnesota Fed has no influence on the policy process..."

      That's completely false. The ideas that came out of the place influenced the whole profession, and found their way into policy, in various ways.

      "Most of the most successful central banks (Bank of Canada, RBA, MAS etc) don't care if their staff publish in journals and structure their research work to support their policy efforts."

      It's hard to tell how you're measuring success. Take the Bank of Canada as an example. I think we usually think of the B of C as functioning like Ottawa Federal Reserve Bank, presiding over the 13th district. It's hard to find an independent policy idea that came out of there. Further, at the Bank of Canada, they do actually care whether their staff are publishing in serious economics journals. The Bank was indeed restructured so that "research work would support policy efforts." That restructuring was done by a Governor who really had no idea how to use economists as an input to policy - he came from Goldman-Sachs, not a research environment. The bottom line is that I don't think you have much of an idea how research can and should be used in policymaking.

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    2. That's because you yourself have little idea about how policymaking is actually done. I stand by my statement that the Minnesota Fed has essentially no influence on non-US central banks, and its researchers are seen as detached from real policy questions.

      The idea that the Bank of Canada has not been responsible for independent policy ideas is bogus. They were one of the leaders in introducing inflation targeting and have been at the forefront of thinking about different ways of specifying that. Personally I don't like the idea of a price-path target, but at least they are thinking about that. The Monetary Conditions Index wasn't such a success, but again, policy innovation actually introduced, assessed, and retained or dropped in light of evidence.

      (Dismissing BoC as the 13th district is academic arrogance beyond belief. What next, are you going to say that Australia is the 51st state and Singapore is too small to count?)

      So what we see in Canada is evidence-based policy, not a bunch of whining about whether academic economists were being used correctly. Don't get me wrong, I think Ellen McGrattan is super-smart in an invent-cool-techy-economic-techniques. I really like the stuff she did with finite element methods. But that stuff basically has no relevance for the policy questions real central bankers with real responsibilities have.

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    3. "That's because you yourself have little idea about how policymaking is actually done."

      I worked full time for two central banks - 1.5 years at the Bank of Canada, 2 years at the Minneapolis Fed. I currently spend time at the Richmond Fed, and the St. Louis Fed. In the past couple of years, I've been on the premises of the Bank of England, the Swiss National Bank, the Bank of Italy, and the Bank of Canada. In the past, I've been at the ECB, the Reserve Bank of New Zealand, the New York Fed, the Cleveland Fed, the Atlanta Fed, the Kansas City Fed, the Board of Governors in Washington, and maybe others I forgot. If you read my blog posts, you'll see that I pay attention to monetary policy and what central banks are up to. You're the person who doesn't know much, apparently.

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  15. Being president of a district reserve bank means a lot more than running a research department. Among many other things it requires timely, policy-relevant information. Of course, you can't ask world-class macro researchers to run a bunch of regressions and do simple descriptive data analyses, so that means hiring economists with more competency than a grad student, but who can take directions.

    One might think this could be done in a manner minimally disruptive to the existing researchers, but not if they react with temper tantrums to the use of new resources for anything other than recruiting more high-powered researchers (who do the right kind of research). When it comes down to it, a Fed research department isn't an academic department; they exist to serve a purpose within a hierarchical organization. Is it a shame? Yeah, but it didn't have to be this way.

    Lesson learned: If you want to run a think tank, get private funding.

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    1. "...so that means hiring economists with more competency than a grad student, but who can take directions."

      I disagree. The hard part of running a research department, is getting quality people who can actually do good research. Once those quality people are in place, then they can do a better job than low-level people of policy-advising, and they can do it more efficiently. If what is wanted is people who will agree with all of your ideas, if that is what you mean by "following directions," then of course you should hire some lackeys. But that won't produce good policy.

      The arguments you are making are almost exactly the same as the ones that people sometimes make in universities - that research somehow detracts from the "true mission" of the university, which is teaching the students. But, in a university, good research and good teaching actually go hand-in-hand. It's also true that, in a Federal Reserve Bank, good research and good policy go hand--in-hand.

      One further point: If you have the idea that the researchers in Minneapolis were not willing to do policy work, I don't think that's true.

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    2. You are misunderstanding what the other Anonymous (not me) means by "take directions". It's not about agreeing with all of your ideas. Indeed some of the central banks that did particularly badly in recent years (*cough* Bank of England *cough*) did so in part because of imperious leadership by former academics who wanted people to agree with his ideas (this is a matter of Parliamentary record, not my opinion - I'm just saying it more baldly).

      It's the practical, smart policymakers (who can read good research critically but long since given up doing their own) who acknowledge that they don't know everything that end up using their researchers (and everyone else's!) more effectively.

      "Taking direction" is about saying "I don't care if it won't get published in the JME. XYZ is a big issue for us right now and I want you to work on that, not what you did your job market paper on." Central bank research economists have to be nimble, not narrow.

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    3. "I don't care if it won't get published in the JME. XYZ is a big issue for us right now and I want you to work on that, not what you did your job market paper on."

      That's not how it works, ideally. It's true that there are some issues that are urgent for the President. There's an issue that's going to be discussed at the FOMC meeting, and someone is going to have to do the work to brief him or her. That may require digging through papers written by other people, or doing some work on your own. As to longer-run research projects, there has to be to and fro there. Staff economists are aware of what the pressing issues are, in part because it's part of the general discussion, and that has to influence their research. But there's also value in independent ideas that come out of the research department - ideas that are tested in the market, i.e. by being submitted to economics journals. It's not all top down, where the research is directed by the person at the top. It's a group project.

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  16. Great post Steve. Just one question. Do you think it is fair to the American taxpayer that the folks who were marginalized or shown the door were earning two hefty salaries (from the Fed and the University), one of the two pretty paid by the American taxpayer, while refusing to do any policy work because they were either too smart or too busy chasing the Nobel prize? To me, they were just exploiting a loophole. Now they can no longer do that. If they are smart, they will find another 500k-a-year job and convince their employer that they are too brilliant to waste time teaching or doing boring policy work.

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    1. The value of research is very hard to measure. As a result, it can sometimes be difficult for those of us who do research to justify our existence. What's the role of research in a university? How much of it and what kind should we have? Why should the Federal Reserve System be subsidizing research? Those are important questions. In this case, I think something that is socially valuable is being destroyed, and the thing that is being destroyed is greater than the sum of the parts. I should add that I think it's incorrect to characterize this as high-paid people refusing to do policy work.

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    2. Who said they refused to "any policy work "? This is a very funny way of describing someone who has written at least 20 papers with the word 'policy' appearing in their title! If someone has different views about appropriate policy than the FOMC, that does not mean they are not doing "any policy work " or they are not interested in it. It means they disagree on what is a good policy. Nobody "refused" to do policy work as far as I know.

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    3. Ok, I just learned that this paper http://www.aeaweb.org/articles.php?doi=10.1257/mac.1.1.242
      counts as policy work. Imagine how useful that advice might be when Kocherlakota walks into the FOMC room...

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    4. Why isn't that useful? Maybe not, if you define what is useful as something that supports your preconceived ideas, or what everyone else in the room is saying.

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    5. There's a bigger issue here, which is that there are a lot of economists who are all too willing to say free-markets this and preference-for-leisure unemployment that and structural reform the other thing, and never acknowledge - even to themselves - that they are members of one of the most cosseted professions on the planet. If you have a decent US PhD with a macro-ish speciality, your employment options are a more-or-less unsackable job in an international organization, a more-or-less-unsackable-once-you-get-tenure job in academia, or a used-to-be-unsackable job in central banking.

      It's no wonder ordinary, highly sackable, folk look at these economists and get pissed off.

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    6. So you're envious that other people have succeeded and you've failed?

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    7. I guess Econ 101 would tell us that compensation is good when our skills are in demand, and those skills are scarce. Envy will get you nowhere.

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    8. I'm not envious. I am an economist and I have one of those jobs. I just know better than to prescribe "flexibility" for everyone but myself and my profession. It takes a huge lack of self-awareness not to see that disconnect, but, consider the other participants in the conversation.

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    9. If you are an economist then you are probably not a good one. For example, you fail to recognize that payments come in monetary and non-monetary form. Tenure is largely the reason why talented economists choose to forgo higher salaries in finance, consulting, etc. and instead take jobs in academia. As far as flexibility is concerned, you may have heard of an economist named Oliver Williamson, after all he does have a Nobel Prize, and his work on optimal contracts with relationship-specific investment. If you had undergone the tenure process, you would know that during its six or so years you have to work your ass off to prove worthy of it, and while much of what you do raises your market value, a good chunk of it does not. Tenure is a way for the university to get the faculty to invest in those activities. Finally, in the case of McGrattan or Kehoe, tenure is irrelevant. I can't think of a single institution, other than the Minneapolis Fed apparently, that would not want them in their payroll, if they could afford them that is. Steve is not writing out of concern for either of them. His concerns lie with the Minneapolis Fed.

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  17. Of course the real issue is that Kocherlakota is an empirical guy and changed his mind about not following a hard money line anymore because the evidence suggested that, big surprise, we need loose money during a recession. This massively pissed off the blog author.
    So thumbs up for Kocherlakota, an economist not driven by ideology but evidence.

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    1. In this case, I think the basic issue has nothing to do with Narayana's views on policy, which you obviously share. This is about management.

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    2. Anon 2:56 seemed to miss the entire point. Impressive, to post nothing correct.

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  18. So what do Ellen's comments to startribune imply for people who continue to work at the fed, such as Arellano, Amador, Yogo and others, that they are not worthy mention, they are not as accomplished as herself or the people she is mentioning. This could not be further from reality. And speaking to the journalists, while knowing that neither Narayana, nor the Fed would be able to comment for all sorts of legal issues, just exposes one side, and leaves the story completely off-balance. She should have followed Kehoe's steps and chose not comment, because there is also not very much in her comments that helps to clarify anything. The president of the Fed would not be discussing the staff policy, just as he would not discuss many other issues due to his position. This is basically a provocation on Ellen's part.

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    1. "And speaking to the journalists, while knowing that neither Narayana, nor the Fed would be able to comment for all sorts of legal issues, just exposes one side, and leaves the story completely off-balance."

      Well, in a war, people use whatever weapons they can find, and take advantage where they can. Who is to say whether the story is "off balance" if one side won't talk, even internally?

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    2. So could you remind us, please, why and how Ed Presscot left UMN Economics, and whether there were as many war-like moves and hurt feelings back then?

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    3. As I said, "in a war..." Further, when you go into a war, you have to anticipate all this, and decide whether the fight is worthwhile.

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    4. I don't think this is an answer to the question regarding Ed. And as Ed's example shows you never know on which side of the "war" you may find yourself next. I don't think Ellen or Pat are the first or the last ones... other battles will come up as well...

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    5. Actually, it's hard to figure out what your question is.

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    6. Question: So could you remind us, please, why and how Ed Presscot left UMN Economics? I don't think this was pretty either...

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    7. Why are you asking me? Sounds like you know. Maybe you could do the reminding?

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  19. So when is this getting on TV? If Ellen continues to talk Rob Ford should start worrying about his on-air time. Thanks Steve for paving the way to the saga... I guess we are bored to death with other hiccups in the profession, need to keep up the flames...

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  20. It is all about EGO and personal ambition, and we help to sustain those egos and ambitions.... That's what happens when somebody gets pointed to the door... Simple phsychology....

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  21. I am a micro theorist and so will not comment on macro. But game theory is my forte, and reputation models suggest that if the US ever disavows its debt, then it might never be trusted again. How, I wonder, can the MN Fed ever attract talent again to forsake tenure for its research confines? Not only that, I wonder how badly *other* Feds are harmed, since the idea is in the air that the positions are risky in equilibrium? My guess is that quality-constant economist wages at all Feds have just gone up, and surely leapt upward at MN. Unless you have the research heft of Kehoe, you'll need a dept waiting in the wings to hire you on a moment's notice. Further predictions are that longer term employment contracts develop at Feds (could Kehoe really be let go on a day's notice?).

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    1. Lones, your predictions seem right, but how did game theory help you make them? Wouldn't you have to know Kocherlakota's payoffs?

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    2. Noah, I merely need know the payoffs of those wishing to get hired at the Fed, that they value job security. The job has suddenly gotten riskier, and it must therefore pay a risk premium.

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    3. If the Fed has to pay some 3-5% more or spend on fancy espresso machines in order to get their researchers to perform what is expected from them, so be it. I do not see any big deal.

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    5. Lones, you are looking at a case where job security was provided through the University. Regional reserve bank employees are not civil service, and thus except by contract, would be at will as are most people. In fact as professionals they appear to be more in the nature of contractors than employees since they have a day job.

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  22. well its fitting that he's called a New Keynsian; since it was Keynes that said "when the facts change, i change my mind, what do you do, sir?"

    Aside from Kocherlakota's intellectual honesty, is it also possible that these guys fro fired for taking too much time vacationing?

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    1. Hmmm. I guess I think it's not intellectually honest for you to be calling Narayana intelluctually honest.

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    2. Ok, I am just a simpleton, but shouldn't one say that umbrellas are needed, if the climate changed and rain is the outlook for the foreseeable future (not the infinite horizon, mind you) from a nice balmy past?

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    3. I've never been fond of analogies in economics, e.g. "when the patient is hemorrhaging, we need more than a bandaid," and such. Not very helpful.

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    4. Second thought: But, if I follow your analogy, in this case it's not obvious that you need an umbrella in the rain, or that it's raining.

      Delete
    5. So I guess you disagree with Larry Summers' characterization of certain theories as "ketchup models" ...(maybe "video game models" actually). Or his recent observation, that there will be people writing papers in Minnesota, concluding that if we were to have a full-scale power outage in the U.S. for a year, it would not matter in the infinite horizon (since electricity generation is only about 4-5% of gdp)

      Delete
    6. See: http://newmonetarism.blogspot.com/2013/11/larry-summers-at-imf.html
      Summers is out of touch with the profession. Why would you think he knows anything about what people at Minnesota or elsewhere work on?

      Delete
    7. Summers' joke was a reference to the infamous piece by Kehoe, McGrattan and Christiano circa 2008 claiming there was no credit crunch (a cheap but well-deserved shot).

      Delete
    8. I read you blog entry on Summers' shot across the bow on Minnestoa and Chicago.

      In some ways I agree with you that secular stagnation may not be consistent with NK models, due to their inherent tendency to mean-revert.

      What they have been successful at (the NK models) was in predicting the aftermath of the crisis and the prolonged period of sub-trend growth, disinflation (or deflation) and the piling up of idle resources.

      Compare that to the dire predictions of Chicago (John Cochrane comes to mind), where he frets about high inflation rearing its ugly head (since 2010). Has that happened?

      Look, as an investment professional, I can tell you that if anyone had followed the Cochrane prescription, they would not be in the business now!

      Delete
    9. "What they have been successful at (the NK models) was in predicting the aftermath of the crisis and the prolonged period of sub-trend growth, disinflation (or deflation) and the piling up of idle resources."

      If you think that, you don't understand NK models. Those models tell you nothing about the crisis, or the aftermath.

      Delete
    10. Maybe I don't. However when in doubt - i was taught- go back to the basics.

      So the standard textbook IS-LM model has been extremely successful, and simple comparative statics from that model have been extremely profitable as well!

      But of course, you would say that Keynes, Hicks, Samuelson, Friedman, Krugman, Stiglitz, Delong, Romer etc, do not understand economics.

      Btw, did you believe Cochrane when he was predicting high inflation? If so, did you short UST (in other word put your money where your mouth is?)

      I may not understand NK models, but I would contend that you may not understand how the world works.

      Delete
    11. Whoa.... I noticed the following, just now, on your blogspot:
      "So, what could go wrong? Plenty.

      1. All of the necessary conditions are there for a substantial inflation. I'm thinking of something on the order of 5% to 10%, and once it gets going it will be costly to stop it. The total stock of reserves will rise to about $1.6 trillion by the end of June, and that represents an accident waiting to happen....."

      http://newmonetarism.blogspot.com/2011/03/fed-and-inflation.html

      So this was 2011. We are still waiting.

      Delete
    12. Som Dasgupta understands nothing if he thinks ISLM models have been successful. Just because Larry Summers wants you to think in terms of a discredited model because he hasn't bothered to learn anything new in 30 years doesn't mean you'll end up actually knowing anything. You're out of your depth here, stick to the shallow end of the pool with the sociologists.

      Delete
    13. LOL. Think you are drowning in you deep end there genius!

      I don't "think" that they have been successful. They have. Its called hard results/evidence.

      Delete
    14. With science like that, we would be living in caves.

      Delete
    15. It really is so easy to get you geniuses riled up, isn't it?!!

      What you need is a dose of homeopathy for anger management.

      So with great humility I offer you a read (in case you may not have already)

      http://noahpinionblog.blogspot.com/2011/08/in-which-john-quiggin-intellectually.html

      Delete
    16. Sorry to burst the bubble boys but Economics is NO science and that is why when folks from Chicago tried to peddle math tools in Eco they floundered badly enough to predict hyperinflation circa 2008-09; as did the author of this blog in forecasting: "I'm thinking of something on the order of 5% to 10%".. My humble petition to leave the heavy Math tools for Engrs. and Mathematicians and stick to the social science root of Economics and who knows one day people like you might come up with better policy recipe.. So put down the Math, slowly, very slowly and start listening to Krugman..

      Delete
    17. As Narayana would say, "thanks for your input.":

      Delete
    18. wow! Slow Friday, so I go through the distinguished prof's website, where he quite liberally slings accusations of ignorance on monetary policy at Krugman?!!

      http://newmonetarism.blogspot.com/2010/04/krugman-again.html

      Dude, you guys are definitely a sub-class for the Dunning-Krueger effect.

      Also, didn't you earlier claim that Kocherlakota was intellectually dishonest?

      Delete
    19. Anonimo:

      Actually, that's Chari, Christiano, Kehoe:

      http://www.minneapolisfed.org/research/wp/wp666.pdf

      Delete
    20. Som, let me make an attempt to articulate why you received the responses you did.

      First, you seem to equate the ISLM model with New-Keynesian models. Please read Steve's post of November 14 and also Cochrane's post. These two models are very different animals! Second, your claim that NK models have matched the data well is puzzling. If I understand the models correctly, Steve please correct me if I am wrong, and if the US GDP has been below potential all this time, then by now we should be experiencing deflation (that's what the dynamic Phillips curve suggests). But we are not. Krugman claims that this failure of the model just proves that inflation is stickier than we thought as it approaches zero (but then why is it not the same in Japan). Me thinks that making more ad hoc assumptions to explain the failure of models already based on ad hoc assumptions is just not good science. It certainly does not work in the NK favor.

      Delete
    21. Anonimo: Why was Summers' joke about Chari, et al (2008) a cheap shot? They missed the Gorton & Metrick run on repo/etc story.

      Delete
    22. In this particular case (the Chari et al. paper) you could argue that the conclusions were incorrect. I think there was a Boston Fed paper in which the claim was that the Minneapolis people were looking at the wrong data. Summers didn't refer to this issue directly. The nature of his comments were: "Well you know about those silly folks out in the midwest, don't you? Ha ha. Wink wink."

      Delete
    23. Thanks; that does sound cheap.

      Chari et al. had lots of company in missing this. In this talk, their paper is referenced as an example of "bewilderment" about what was going on in the early post-Lehman-collapse period:
      http://www.newyorkfed.org/newsevents/speeches/2012/pot121127.html

      Sorry to get off track from the main substance of this post. The recent employment termination decisions at the Minneapolis Fed are very disturbing.

      Delete
    24. Yes, that paper was written in the middle of the crisis, when no one quite knew what was going on. There are still arguments about that of course. Did the Fed do the right thing? Were markets really "frozen?" Etc.

      Delete
    25. Hello CA,
      I take your point. My understanding is that under certain corner solutions, the NK models converge to the standard Hicks-Samuelson ISLM model. Be that (or not) as it may, the simple argument remains, that when we have a great deal of idle resources around, the simple static model, correctly proposes public spending to pick up the slack left by corporate and private deleveraging. I think that the whole idea of secular stagnation is benefiting from a bit of tailwind, form the early failure to adopt a large enough stimulus (for example Krugman had proposed a $2.5-3 tr number and the ARRA got us only $750b, half of which was in transfers that did have benefits, and the rest essentially neutralised by equivalent cuts at the state and local levels). The point, while somewhat counter-factual, is almost inevitably correct on any objective assessment (I refer e.g. to Romers' work in the aftermath of the crisis).

      The deep trouble I have with the Chicago/Minnesota folks and to some extent wit the New Monetarists, is that their basic proposition rests on monetary policy alone targeting the price level or nominal variables to get the economy back to some trend-path. To me that seems like a failure (even deliberate) to admit the obvious role for public investments/consumption. Furthermore, I am always left scratching my head, when the neo-classical modellers appear to say that their models are beyond criticism, as they possess an aether-like quality of saying absolutely nothing!

      That might tickle some academic interest (in pursuit of the elusive phlogiston), but is of precious little help to the practitioner.

      Delete
    26. Steve,

      Here I will disagree with you. The Chari, Christiano and Kehoe paper was awful, it hurt their credibility and that of the Minnesota Fed. I remember when the paper first came out, it immediately triggered a giant ‘wtf’ reaction on the vast majority of economists working in policy making and financial institutions.

      That paper is what it is called in the research departments of policy making institutions a ‘reputation risk’. Somehow management at the Minnesota Fed was sleeping on the wheels back in 2008 and let that working paper leak out of the building. It should not have and because it did, the institution looked out of touch with reality (clueless is a stronger word, but not less precise).

      Having said that, I have no clue why Kehoe and McGrattan were terminated. But I differ with your view of what researchers at the Fed should do. Yes, each one of them should have time for their own research, but their primary obligation should be to serve the research agenda of the institution, and the duty of management is to ease their way out if they cannot contribute to that research agenda.

      Delete
    27. Well, sometimes beauty is in the eye of the beholder. There are some "research" institutions where most of what gets produced is schlock.

      You seem to have a strange idea of the role of management in one of these places. Apparently they should be checking all the papers to make sure that "awful" stuff doesn't "leak" out of the building, and making sure that their underlings are "serving their research agenda." Yikes. What low-level lackeys would want to work in such a place?

      Delete
    28. You seem to believe that the world has to kiss those self-anointed top researchers ass cheeks. I beg to differ. The role of the Fed is not to generate whatever passes for positive externality in research. The role of its research department is not to enhance the work life of U of Minnesota professors, but to serve the research needs of the institution (which include also some 'basic research').

      Delete
    29. "...to serve the research needs of the institution..."

      Exactly. Not to serve the master.

      Delete
    30. That's right. And if one's research does not fit the research agenda of the institution, what's to stop one from carrying out that research in academia or another institution?

      Delete
    31. Som still doesn't get it. The ISLM model DOES NOT FIT THE DATA. End of story. Whether other models do or do not is irrelevant to this point. Once you quit throwing your tantrum, you might have some time to learn something.

      Delete
    32. This is what I learn't (among many other things): that when you are operating on the flat portion of the LM curve, getting inflation is awfully difficult without a large shift up in the IS curve. So expect little or no inflation. Therefore buy BONDS. For 3 straight years. What did you learn? "Hmmm let me see I learn't that my models don't say anything! So I won't hear any criticism that it is expects it to say something"

      Delete
  23. This is really unfortunate. Given the unsettled nature of macroeconomics, the Fed needs the best talent to figure out what works and what does not for policy. Letting go of really topnotch economists says something about the direction the President wants the Fed Minneapolis to take though. May be he thinks he would have more flexibility and control over directing the course of research with new talent than old. Given his September speech, I think that direction is definitely New Keynesian! This only mean that the other Feds have to work harder to bring diverse perspectives to bear on policy questions.

    ReplyDelete
    Replies
    1. Though the focus of the conflict is on older people, there are plenty of young researchers there, and potential young researchers that might think about working there. What are those people thinking now. One of the important words you used is "control." That's not the way any manager in a research institution should be thinking about the problem.

      Put the shoe on the other foot. What would you be saying if a new President came into the New York Fed and started firing the New Keynesians?

      Delete
  24. It is unfair to fire anyone for his or her beliefs. I also agree that control may not be the way of looking at management of any institution for that matter. I was trying to see if Kocherlakota's actions make sense in any world at all!

    ReplyDelete
    Replies
    1. It would help if Kocherlakota would say something about it. Obviously he can't comment on personnel matters, but what's his vision for the direction of the research department?

      Delete
  25. i'm a little bit confused about the reason for these dual appointments at the fed and university of minnesota. a number of policy papers have been discussed through this ordeal, but if we take the case of something like "New Keynesian Models: Not Yet Useful for Policy Analysis" surely that paper would have been written without the fed positions? are these dual appointments mainly to keep kehoe, chari, and co from going to universities willing to pay more than university of minnesota can offer alone?

    ReplyDelete
    Replies
    1. They see (saw?) it as a single research community. The community cooperates on appointments and compensation.

      Delete
  26. I didn't see this post til now but....DAAAAAAAAMN. Those are some fightin' words.

    ReplyDelete
    Replies
    1. Here's something else that might help you understand why people might be bothered by these developments. What evolved over the last 40 years was an implicit agreement between the U of M and the Minneapolis Fed. For example there was a least one case in the past, when a Fed official went to the University and pleaded with the U to take an action that would help the Fed retain an important person. This had to do with an appointment to a person at the U, who was not in economics. Similarly, the Fed had occasion to do things to help the U, and there was trust between the 2 institutions. In the current case, a Fed employee, who was also a U employee, was fired, without any consultation (as far as I know) with anyone at the University. So, the implicit agreement seems to have been declared void. Important, don't you think?

      Delete
    2. Oh don't get me wrong, I understand why people might be bothered, and I understand why it's important. When I saw the news yesterday about Kehoe and McGrattan, I yelled "Whoa!!" and everyone in the train looked at me funny.

      Delete
    3. Actually, Miles and I are thinking of writing about the firings in an article for Quartz. We'll try to take a neutral tone, of course.

      Delete
    4. Plenty of interesting things going on here. How should we fund research? How do you get good policy advice? What's the relationship between academia and governmental and quasi-governmental institutions?

      Delete
    5. Also, what's tenure for? I'm certainly glad I have it.

      Delete
  27. Do you know of any precedent for senior researchers being fired like this?

    ReplyDelete
    Replies
    1. Most of the regional Feds have arrangements with visiting academics that are flexible. They're typically reviewed annually, and people understand that, given how the money is budgeted, that it may not be there in the next year. So, there need not be any hard feelings about failure to renew a contract. Pat Kehoe is different, as my understanding is that he was a full-time Fed employee (or full time for part of the year). It's highly unusual for a Fed employee to be fired outright, and certainly for someone who apparently is highly productive in terms of what he was hired for. You can probably find instances of people in senior positions who have been fired in the Federal Reserve System, just as in any organization. I know of a case like that, and there was broad agreement in the organization concerned that this nasty thing had to be done. That case has nothing in common with this one.

      Delete
  28. One comment above said: "So what do Ellen's comments to startribune imply for people who continue to work at the fed, such as Arellano, Amador, Yogo and others, that they are not worthy mention, they are not as accomplished as herself or the people she is mentioning."

    Do you really think that all of these folks are really sitting still? You need to check back with the rumor mill.

    ReplyDelete
    Replies
    1. Yes, see Lones Smith's comment. He has this figured out.

      Delete
  29. There is a simple solution to all the criticism to the two NKs. All against them need to get appointed as president at one of the Feds. Next, await for the next crisis and apply their preferred model and see the results. Before this happens, all comments and criticisms here remind me of those angry movie critics (typically directors in disguise): Tons of cheap talk but no serious substance.

    ReplyDelete
    Replies
    1. So, we're to understand that criticism of public policy and public officials is pointless, or wrong, or what?

      Delete
  30. So, Miles and I ended up writing this: http://noahpinionblog.blogspot.com/2013/11/new-quartz-article-battle-for-soul-of.html

    ReplyDelete
    Replies
    1. You should make another top-level post, since your Liquidity Constraints post is currently the latest.

      Delete
    2. I think I should write my reports and get ready for class tomorrow.

      Delete


  31. Anonymous2:10 PM

    I read the paper that Professor Krugman linked to on his post. My god. What a naïve and silly interpretation of cataclysmic events in 2008. Can you imagine Chari/Kehoe running the Fed instead of Bernanke in 2008. Makes me thankful for having Bernanke. And trust me, I am no Bernanke fan. I think he helped created the bubbles to start with. But at least he has learned. These people should not be in policy circles. They deserve to be fired from the Fed.

    ReplyDelete
    Replies
    1. Actually, you're the naive and silly one. The Chari/Christiano/Kehoe paper may have drawn the wrong conclusions based on the wrong data. ( I'd have to go back and look at it to remember what the issues are.) Even if that paper were a piece of crap, I wouldn't use that to draw general inferences about the quality of work those people produce. In fact, if we use objective measures of research quality (instead of hearsay from DeLong and Krugman, who you can't trust), we get the following:

      http://ideas.repec.org/top/top.person.all.html#pke4

      http://ideas.repec.org/top/top.person.all.html#pmc46

      So according to the repec rankings, we have the following:

      Pat Kehoe: 107
      Ellen McGrattan: 276

      As reference points:

      Narayana Kocherlakota: 367
      Ben Bernanke: 43

      I didn't bother to check, but I think you would be hard pressed to find any economists working in the Federal Reserve System (excluding Bernanke) ranked above Pat Kehoe. So that's based on citations, number of publications weighted by journal quality, etc. How do you do on that list?

      Delete
    2. But why number of citations is a relevant metric for a Fed research economist? I understand why that is relevant, even crucial, for evaluating a scholar in academia, but last time I checked the Fed system is not in the research business. Pat Kehoe is a fine researcher, no doubt, but it is not clear to me that anything he did in the last 5 years was relevant for the Fed. Plus, it is a little bit of a stretch, but he may even have been behind the claim that low interest rates may cause deflation that NaKo floated a few years ago - another big embarassment to the reputation of the Minnesota Fed.

      Delete
    3. "...but last time I checked the Fed system is not in the research business."

      Seems you last checked in 1922.

      Delete
    4. Not a core activity by any means.

      Delete
    5. Two more reference points from repec

      Krugman #23
      Williamson #729

      Delete
    6. Yes, and note that 729 ain't bad. The repec list includes dead people. To put it in perspective, think about how many economists there are in the top 20 economics research institutions in the world.

      Delete
    7. So what would be the Fed's core activity? Check clearing?

      Delete
    8. Here is the abstract from the paper I was talking about. If their research prowess leads to the conclusion that there is NO need for government intervention - I am sorry, they are a bunch of clueless academics. Bernanke was wise not to listen to such gibberish. As for hard data, it was all around us even in Oct 2008. The economy was tanking in front of our eyes. The Minneapolis airport was empty. Obviously these three never got out of their offfices.

      "The United States is indisputably undergoing a …nancial crisis and is perhaps headed for a deep
      recession. Here we examine three claims about the way the …nancial crisis is a¤ecting the economy
      as a whole and argue that all three claims are myths. We also present three underappreciated
      facts about how the …nancial system intermediates funds between households and corporate busi-
      nesses.Conventional analyses of the …nancial crisis focus on interest rate spreads. We argue that
      such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, dur-
      ing …nancial crises, variations in the levels of nominal interest rates might lead to better inferences
      about variations in the real costs of borrowing. Moreover, we argue that even if current increase
      in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does
      not necessarily indicate the need for massive government intervention. We call for policymakers to
      articulate the precise nature of the market failure they see, to present hard evidence that di¤erenti-
      ates their view of the data from other views which would not require such intervention, and to share
      with the public the logic and evidence that burnishes the case that the particular intervention they
      are advocating will …x this market failure."

      Delete
    9. As the Federal Reserve Act says, "the Federal Reserve shall strive to publish as many papers as possible in top Econ journals so as to effectively promote the goals of maximum employment, stable prices, and moderate long-term interest rates."

      Joking aside, Stephen, anonimo's point is pretty obvious, i.e. the Fed's business is conducting monetary policy in a competent way and research is there to help that happen. I understand that, in your opinion, Minnesota research has been a net positive to policy making post-2008 (or could've been if only Kocherlakota had listened to his top researchers). That might well be true, but I don't think saying that these researchers published in top journals proves much.

      Delete
    10. "... but I don't think saying that these researchers published in top journals proves much."

      Some people were actually claiming these people are bad researchers (Krugman, for example). I was giving you some objective evidence that that is not true.

      Delete
    11. Fair enough. Thanks for the reply, Prof. Williamson.

      Delete
    12. "The Chari/Christiano/Kehoe paper may have drawn the wrong conclusions based on the wrong data. "

      Surely they had access to the best data at the time (or they could have walked out on the street and looked), but evaluation of data should be the first job of anyone writing a paper, and if this was the reason they blew it, well yes, they should have been let go.

      Delete
    13. You seem to think there was a lot hanging on this paper. Most of what they say in the paper seems pretty qualified. Even if the paper was a complete piece of crap, who cares? They wrote the thing in 2008, and those people are super economists and do plenty of good work. Big deal. Krugman apparently would tell you someone can't walk because they trip over a curb once in a while.

      Delete
  32. One more comment on things

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/11/on-firing-your-advisers.html#more

    ReplyDelete
    Replies
    1. Plenty of people with little to say who feel compelled to say it, apparently.

      Delete
  33. Millions of people lose their jobs and are out of work for long spells during the Great Recession, but some economists only get concerned when two of their own become partially unemployed.

    ReplyDelete
    Replies
    1. "...only get concerned..."

      Baloney. I'm concerned with everyone on earth, including you.

      Delete
    2. I'm concerned with everyone except Anon 8:56, personally. He should be fired.

      Delete
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