Miles Kimball and Noah Smith elaborate on the upheavals at the Minneapolis Fed I “:The shakeup at the Minneapolis Fed is a battle for the soul of macroeconomics—again”:
The Saltwater macroeconomists believed that recessions were economic failures, and that monetary policy was important in fighting them. Led by Michael Woodford, they adopted the tools and language of the Freshwater economists, and managed to convince many of their Freshwater brethren to reluctantly agree that monetary policy can, in fact, boost the economy.
“By adopting the tools and language of the freshwater economists…” means that “money” was taken out of the picture. It´s “Interest & Prices”. To me that´s one of the reasons (together with the inflation target ‘obsession’) that the economy remains depressed more than four years on.
A few months later, at the end on 2008, America tumbled into its biggest economic slump since the Great Depression, soon followed by much of the rest of the world. Freshwater macroeconomists were left scratching their heads. How could this calamity represent the efficient outcome of a well-functioning economy? But the Saltwater New Keynesians—who included Fed chairman Ben Bernanke—had an answer: the economy had malfunctioned, and America needed the Fed to get us out of the hole. Bernanke and the Fed responded first by extraordinary measures to contain the financial crisis that was the immediate source of trouble, then lowering interest rates to zero and beginning an unprecedented campaign of Quantitative Easing.
See, since there´s no “money”, the economy, not monetary policy, had malfunctioned!
In any case, speculating on the reasons for what ultimately might boil down to simple personality conflicts is not our purpose here. Nor do we seek to offer any judgment on Kocherlakota’s personnel decision, which could have far-reaching impacts on the relationship between central banks and universities and the type of employment contracts offered by Fed banks. Instead, we want to highlight the tectonic shifts in economics itself. From that perspective, the shakeup may turn out to be part of the understandable rebalancing of macroeconomics in the Saltwater direction, as economists try to comprehend the Great Recession and figure out how to avoid an encore.
God forbid! Because the ‘liquidity trap’ idea also reduces to (almost) nothing any role for monetary policy. And a “Great Stagnation” is becoming the ‘thing of the future’!
PS I wrote a short post on Kocherlakota´s decision. In a private exchange I said this:
I hate when people go on a “conversion” trip and do what he´s trying to do. The Minneapolis Fed has a long and important research history. Just as the St Louis Fed was the “house of monetarism”, the MN Fed was the “house of RBC”.I think the freedom to pursue research is important and NK is trying to stifle that freedom (“it´s either my way or the highway”!)
HT Travis V