The U.S. economy has the opposite problem now: too-high unemployment and too-low inflation. But Kocherlakota is arguing that, again, resolve by the central bank is the solution. Here is his key argument:
I’ve spent a lot of time talking about 1979, because I see three key parallels between the economic situation in 1979 and the economic situation in 2013. First, just like in 1979, the Federal Open Market Committee faces a challenging macroeconomic problem—although this time, the problem is stubbornly low employment as opposed to stubbornly high inflation. Second, there is a widespread perception that monetary policymakers lack either the tools or the will to solve this problem.
Rooseveltian resolve! Reiterating Christina Romer. Bullard and Kocherlakota have really impressed me with how they altered their views as new evidence came in. They dispaly some realy integrity.
And third, the perception of monetary policy ineffectiveness is itself a key factor in generating the problem. Let me elaborate on this last point. If the public thinks that monetary policy is ineffective, then it will expect relatively weak macroeconomic conditions in the future. But these expectations about the future have a direct impact on current macroeconomic outcomes. If households expect their incomes to be low in the future, they will save more and spend less today. If businesses expect low future demand for their products, they will invest less today and hire fewer people today. In this way, any perceptions of future FOMC ineffectiveness in generating favorable macroeconomic outcomes are hurting current employment.
Narayana Kocherlakota's Brilliant Speech by Matthew Yglesias