Narayana Kocherlakota is out at the Federal Reserve Bank of Minneapolis and Neel Kashkari is in. Is there some rule that the president of the Minnesota Fed must have the initials “NK”?
Well anyway, in the meantime, let’s think about what Kashkari’s appointment means for the Fed.
First of all, Kashkari, a former Treasury official, isn’t obviously the liquidationist — a foe of government intervention during financial crises — that some of my econ blogging colleagues have made him out to be. Paul Krugman raised this fear, based on the following Kashkari quote from Twitter:
Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def[icit] spend[ing] is futile.
But this view isn’t outside of the bounds of standard economic theory. If growth was above potential in the mid-2000s because of a bubble, it makes sense to say that demand-side policy won’t be able to return us permanently to the growth rate we enjoyed during those years. Of course, muted inflation during the housing bubble years might challenge the notion that growth was above potential, but that is a separate issue. Kashkari is basically just saying he thinks growth was above trend, which isn’t really a liquidationist position.
University of California-Berkeley economist Brad DeLong, meanwhile, is worried that Kashkari is an unreasonable hard-money hawk. This is based on tweets in which Kashkari called monetary stimulus “morphine.” But although Kashkari may be a hawk, the “morphine” analogy isn’t necessarily a bad one. Monetary policy — indeed, all demand-side stabilization policy — does provide a temporary boost, like morphine.
But is it addictive like morphine? Some people believe that the Fed’s low interest rates cause “expectation anchoring,” so that companies come to believe that zero interest rate policy is permanent. If this happens, the economic penalty from raising rates from zero may be increased — much like withdrawing from morphine. So if Kashkari is just talking about expectation anchoring — and it does look like he is — then his analogy makes sense.
So I doubt that Kashkari is either a liquidationist or a crazy monetary hawk. Instead, his comments reveal him for what he is — a non-economist. Kashkari is an engineer with an MBA, which makes him stand out in an institution that is dominated by people with doctorates in economics.