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Minneapolis Fed should expand — not limit — ties with University of Minnesota

Mayo Memorial Building, University of MinnesotaCreative Commons/A GudeThe Minneapolis Fed had cut its ties with two economists associated with the Department of Economics at the University of Minnesota, Patrick Kehoe and Ellen McGrattan.

The Federal Reserve Bank of Minneapolis got lots of press last week. It started Monday with a blog post, Problems in the Great White North, in which economist Stephen Williamson of Washington University wrote that Minneapolis Fed President Narayana Kocherlakota “has declared war on his own research department, and seems intent on destroying the place as a research institution.”

On Wednesday, Adam Belz of the Star Tribune wrote a piece describing what was up on Hennepin Avenue. The Minneapolis Fed had cut its ties with two economists associated with the Department of Economics at the University of Minnesota, Patrick Kehoe and Ellen McGrattan. Kehoe is the Frenzel Professor of International Economics and was a monetary adviser at the Minneapolis Fed.  McGrattan “will take a position with the University of Minnesota in January and will go on unpaid leave at the bank. She has been an adjunct professor at the U since 1993,” according to the Star Tribune.

By Thursday Minnesota Public Radio, the Financial Times and Bloomberg were covering the story, and on Friday the Wall Street Journal joined the club.  According to Bloomberg: “The Fed district bank’s board ‘fully supports the vision of its president, Narayana Kocherlakota, for the bank’s research department,’ Mary Brainerd, the board’s chairman, said today in an e-mailed statement. ‘Under his leadership, the bank has significantly expanded the size of its research department, adding diversity in skills and perspectives.’”

Why all of this attention for the research department of one Federal Reserve bank? Because the collaboration between the Minneapolis Fed and the U of M Economics Department has been fruitful for both parties and a model for other universities and Federal Reserve banks.  

Working together

The Minneapolis Fed and the Economics Department began working together in the 1970s. In particular, economists such as Edward Prescott, Thomas Sargent and Christopher Sims did work that fundamentally affected macroeconomics and earned them Nobel prizes in 2004 and 2011. President Gary Stern and Director of Research Art Rolnick nurtured the relationship from the 1980s through 2009, when both men retired.

Chris Sims recalled the atmosphere at the two institutions during the 1970s during an event in his honor on Sept. 26. He noted that “we were rejects in the middle of nowhere,” with he and Sargent earning PhDs from Harvard but ending up here in “fly-over land.” It turned out to be a blessing, as the opportunity to work at the U and at the Minneapolis Fed encouraged a “rapid free flow of ideas,” especially because “we were all different and argued constantly.”

It helped that scholars on the coasts looked down on their work. Alan Blinder, who became vice chairman of the Federal Reserve in the 1990s and has been a professor at Princeton since the 1970s, once said:“Tom Sargent is a bit out of touch with the real world up there in his office in Minneapolis” as opposed to the real world of Washington.

Here are two suggestions to improve the relationship. First, the Fed and the U should broaden their association to include scholars from the Department of Applied Economics, the Humphrey School of Public Affairs, the Minnesota Population Center and the Carlson School of Management. Economists in all of these areas could bring their skills to the Fed and the research department could tap the skills and resources of these U of M researchers and programs.

Second, I hope they use this opportunity to broaden their reach and renown beyond macroeconomics. The partnership fostered a revolution in macroeconomics but has overshadowed important work in other areas carried out at the bank. For example, Thomas J. Holmes and James A. Schmitz, Jr have conducted path-breaking research on productivity growth in manufacturing, mining and agriculture; this is critical work to disseminate given that some economists such as Lawrence Summers are now talking about a “new normal” of lower productivity growth and slowly growing living standards.

Model collaboration

The alliance between the Minneapolis Fed and the U of M Economics Department was the first of its kind and has been a model for this kind of collaboration. The St. Louis Fed, for example, is busy copying this model and creating a close relationship with Washington University. Nowhere, however, has the partnership worked as well as it has in Minnesota.  

When Stern and Rolnick retired at the same time in 2009, I worried that there might be problems. I did not have doubts about the abilities of either Kocherlakota or his new research director, Kei-Mu Yi. Rather, 25 years of leadership from Stern and Rolnick had to have created a sense of “this is the way things are done” that would resist change. Any attempts to shake things up would be difficult if the changes weren’t handled delicately. It looks from the outside like the frictions couldn’t be overcome.  

Belz quoted Nobel Laureate Ed Prescott as saying: “It sends a bad message.  Something very good is breaking down rapidly. Will something new rise out of the ashes? I think that’s what Narayana hopes, but I’m not optimistic.”

Perhaps, but I think this could be the start of a broader, deeper collaboration if each side enters into it honestly and in good faith. Here’s hoping that’s what happens.

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Comments (9)

economic narrow-mindedness

if the U's economics department is clinging to a narrow-minded free-market mantra (as I've sometimes heard), then the Fed is absolutely right to begin to broaden the conversation about the potential of monetary policy.

not sure to what extent this is the case, though...

That's hilarious

because just the opposite is true. I mean, their econ building was named for Walter Heller, chief cheerleader for the fraud known as Keynesian economics.

I would love to hear you describe what Keynsian economics

is and which party decided to run general operations on deficit financing.

Mr. Tester needs to do a little research...

What exactly is Keynesianism?

Turns out that the dust up at the Fed MAY have been over "Freshwater" vs. "Saltwater" versions of Keynesianism.

"The shakeup at the Minneapolis Fed is a battle for the soul of macroeconomics—again – Quartz"

link: http://ow.ly/rcQob

A new wrinkle in dissing Keynes? Now you have to specify which flavor you mean.

In thinking about a closer relationship

between the U and the Fed, I hope people will keep something in mind.

When I first read "Problems in the Great White North" I noticed some disturbing comments on the post. I put these in a short blog post on The Periodic Table (link: http://ow.ly/r9Ymh ) as well as in an earlier comment on MinnPost ( http://ow.ly/r9YEN ).

Although it is pretty hard to deny past benefits of cooperation and intellectual interchange to both the U and the Fed, nowadays this may no longer be possible. The U cannot be all things to all people and should, perhaps, focus more on its teaching mission?

Dr. Kocherlakota, as a former head of the economics department at the U, may realize this also.

Good suggestions

I'm a long way from being an economist, but Bill Gleason's comment seems relevant, and might deserve some elaboration in the context of the departures that have been the focus of attention recently. So, however, do Mr. Johnston's suggestions. Both suggestions make sense to me — keeping in mind that I have zero credentials as an economist, and couldn't tell you where the Fed's building is. Times change and institutions — if they hope to be productive and beneficial over the long haul — sometimes need to change, as well.

Can't this be explained

Can't this be explained by the fairly particular view of macroeconomics associated with the U (I don't know anything about either of these individuals) and the rather public break with that view that Dr. Kocherlakota has made in the last few years?

I can't claim more than a cursory knowledge of the subject, but I have to applaud Dr. Kocherlakota for seemingly being open to evolving his views based on actual evidence. And I can't help but think that a diversity of views within the Minneapolis Fed research department might be a good thing.

The U can offer others

One assumes that there are more than two economists at the U?
This doesn't mean the relationship need be over.

I very much like Mr. Johnson's suggestion about

broadening the scope of the collaboration with the U to include the other departments he suggested.

I don't know the department well now but it could always have gotten stale in it's approach and perhaps not thinking outside the box.

Perhaps they might entice Tom Stinson in for a bit of research. I think the Fed likes applied research and that is right up Tom's alley.