“Suffice to say that I am very surprised by his current policy views and how he articulates them,” Stephen Williamson, a professor of economics at Washington University in Saint Louis, said in an email. “I don’t think his views have changed. I think this is just a side of Narayana we didn’t know was there.”It's useful to compare that to my email conversation with Appelbaum. I left out one question, which I thought was too personal, and I did not answer the question. Here's the rest of it:
BA: More than four years later, how would you assess his performance as president of the Minneapolis Fed?
SW: I'm guessing that if you asked the participants at FOMC meetings what they thought, they would be very enthusiastic.
BA: Narayana has argued that stronger forward guidance could help to increase employment, and that the Fed has room to try because inflation remains low. Why do you regard this view as mistaken?
SW: I think that the Fed's experiments with forward guidance have been unsuccessful. They have only succeeded in confusing people. A useful exercise is to count the number of words in the FOMC statement, and compare pre-financial crisis to post-financial crisis. I can parse that and understand what the FOMC is trying to say, but I think the average financial market participant has trouble with it, and the average person on the street would be completely lost. Further, the forward guidance has not been consistent over time. The FOMC first specified an "extended period" of low interest rates, then calendar dates, then a threshold specified in terms of the unemployment rate. Now they are back to extended period language - roughly - along with words about what happens if the inflation rate is low for a long period of time. It's hard to see why more language in there - for example about the unemployment rate threshold - could make any difference.
Further, I think that the reason inflation is low now is because short-term interest rates have been low for a long time. The longer they stay low, the longer inflation will remain low. That sounds counter-intuitive, but I think it's right. One of the most astute things that Kocherlakota said in public is in this speech:
That essentially makes the same point. The idea is that, the way the Fed thinks about the problem they're facing traps them in a low-inflation environment.
BA: You wrote in September, "Fed officials like Kocherlakota seem to want to argue that the failure of policy to 'cure the problem' is just a license for doing more." Kocherlakota, I think, would say that the Fed has a legal obligation to keep trying so long as inflation remains low. What is the downside to trying?
SW: The "legal obligation" i.e. the "dual mandate" is quite vague. For example, I think if you look at the FOMC statements during the Greenspan era (though granted that was fairly tranquil) you'll find little or no mention of anything to do with the "real" economy - e.g. the unemployment rate - in the policy statement. Greenspan was deliberately vague, and Congress never gave him a hard time about it. The danger of speaking too much to the real part of the mandate (i.e. "maximum employment") is that the Fed's ability to influence real activity is subject to considerable uncertainty, and no one thinks they can have an effect on real activity for long. If Fed officials continually make statements to the effect that they can do things which they cannot do, that is a problem.
BA: You wrote in 2010, "The Narayana I knew would have thought the worldview represented in standard Keynesian economics was hopelessly naive." How would you describe Kocherlakota's views on monetary policy before he joined the Minneapolis Fed? Are those views apparent in his work as an academic?
SW: As an academic, Narayana was a very sharp researcher, interested in a wide array of issues, few of which actually touched on monetary policy. So maybe I was just making inferences about what his views on policy would be, and how he might go about applying his knowledge in a policy setting. Suffice to say that I am very surprised by his current policy views and how he articulates them.
BA: Do you think his views have changed at the Minneapolis Fed, or that they were previously misunderstood?
SW: Actually, I don't think his views have changed. I think this is just a side of Narayana we didn't know was there.
BA: How do you think the Minneapolis Fed has performed as a research institution under Kocherlakota? Do you see evidence of a shift in the subjects under study, or in its perspective on those subjects? What is your understanding of the reasons for the termination of Pat Kehoe and the separation with Ellen McGrattan?
SW: To date, I don't think that the way Kocherlakota thinks about policy has mattered for how research is done at the Minneapolis Fed. Whatever is going on internally actually has nothing to do with economic ideas, as far as I can tell.