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Kocherlakota took over as president in 2009, after spending several years in the same milieu as Kehoe and McGrattan. He was a research economist at the bank in the late 1990s, a consultant there from 1999 to 2009, taught at the U from 2005 to 2010 and was chairman of the U’s department of economics before being named president of the bank.
McGrattan said she does not know why Kocherlakota would fire Kehoe or let her leave — “It’s absolutely mysterious to us,” she said — but the circle of advisers to the president has shrunk since he arrived and she has been frozen out.
“The last time I talked to Narayana one on one was before he was the president,” she said.
There are subtle policy differences between Kocherlakota and the economists who are leaving. Kocherlakota has been at the center of a debate over the effectiveness of the Fed’s low-interest-rate policy. He has pushed for nearly two years for the Fed to hold down rates until unemployment drops to 5.5 percent.
He argues, in general, that what are known as “New Keynesian” economic models are helpful. This school of thought has helped create an unprecedented intervention in the financial markets by the country’s central bank — the $85 billion a month bond-buying program known as quantitative easing.
But Kehoe and McGrattan published a paper in 2008 arguing that monetary policy can do little to affect the unemployment rate, and Fed policymakers should instead focus primarily on controlling inflation.
“New Keynesian models are not yet useful for policy analysis,” they wrote.
Prescott laments that this sort of debate within the bank, long encouraged, no longer appears to be welcome. “A good administrator sets up a loyal opposition,” he said.
Policy differences aside, McGrattan questions the Minneapolis Fed’s commitment to retaining talented research economists. She said she pushed in the past two years for the bank to keep talented, up-and-coming economists Virgiliu Midrigan, Paco Buera and Kjetil Storesletten, all of whom left.
“We can’t let guys walk out the door, otherwise it’s not going to be a top place,” she said. “It will be difficult for hiring in the future.”
Adam Belz • 612-673-4405 Twitter: @adambelz