Apostasy

Updated  (Thanks to commenters M Krebs UVP estiv and JR)

Dissenting voices are no longer welcome at the Minnesota Fed:

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.

It used to be that the first objective of any macro policy was increasing economic growth.  Austerity was supposed to move the country onto a longer term growth path, at the expense, sadly, of the bottom two quintiles. Instead, contractionary policies have proven to be contractionary.

Time to shoot some messengers.

Whoops. The story is that freshwater economists have been fired for refusing to notice that New Keynesians have proven to be largely correct.