Fed Governor Admits: We're Useless

Narayana Kocherlakota

Photo: Minneapolis Fed

Minneapolis Fed President Narayana Kocherlakota may be one of the most interesting members of the FOMC, because he doesn’t come at questions of monetary policy as either a dogmatic dove or hawk.Instead he’s been warning, ever since the last FOMC meeting, that the Fed is basically useless in this kind of recovery.


Because the unemployment situation is structural, not fixable merely by stimulating demand.

How does he know?

He explained why in a speech given yesterday:

Of course, the key question is: How much of the current unemployment rate is really due to mismatch? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 per cent, we would have an unemployment rate closer to 6.5 per cent, not 9.6 per cent. Together with the San Francisco Fed’s estimate of the impact of benefits, this analysis implies that over 2.5 percentage points of the current unemployment rate is attributable to mismatch.

This estimate is based on a rather aggregative view of the labour market. It is important to dig deeper to get a better understanding of the problem, and there is a considerable amount of research under way exploring the quantitative importance of the various forms of mismatch. For example, the International Monetary Fund has recently released a special study based on a new state-by-state measure of the gap between demand and supply for workers with different levels of educational attainment. The study examines the impact of this variable and the foreclosure rate on state-level unemployment. It estimates that 1.5 percentage points of the national unemployment rate is due to these two sources and their interaction. Thus, according to this study, these two types of mismatch alone can account for a significant fraction of my estimate of 2.5 percentage points.

And then the indictment:

Good economic policy is about using the right tool for the problem at hand. The mismatch problems in the labour market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed.

Read the speech here >

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