Thursday, October 01, 2009

A kind word for theorists 

The Federal Reserve Bank of Minneapolis yesterday named Narayana Kotcherlakota as its new president, replacing the retired Gary Stern effective next Thursday. The press release cites him as helping lead a Fed that "has a strong history of leadership in economic research." Kotcherlakota is a top academic economist (here's a top 1000 ranking on which he's a top-100, and no, I didn't make that list; here's another) and on some bases ranks ahead of Fed Chair Ben Bernanke. His work has been more theoretical than empirical. In some ways he matches fellow new Fed President (and SCSU grad) Jim Bullard from the St. Louis Fed.

So what does this mean for the Fed? I think in part it's a good sign to have people who work in theory more than empirical macro doing policy. We're in a world that has some fundamental change happening within it. The best you can do with econometrics is to say "we had seven other days that looked like today, and here's what happened the day after in those other seven episodes. Thus, I think this is what will happen tomorrow." (OK, that's an oversimplification, but not too much.) But what if you are in a time where you're pretty sure you have no comparable previous episodes? Then you have to think and imagine. Theorists spend more time imagining than applied econometricians do (or historians.) We might make good use of a few of those guys right now.

Not to say this is all Kotcherlakota does -- he wrote a fair bit of econometric analysis earlier in his career. But his later work seems to enjoy the theoretic; either way, his writings at the Minneapolis Fed as an economist are quite accessible.

In case someone was wondering because our universities are 72 miles apart, I've not met Prof. Kotcherlakota.