narayana kocherlakota : economics at the federal reserve banks opening statement by mr narayana kocherlakota, president of the federal reserve bank of minneapolis, at the panel discussion, american economic association annual meeting, philadelphia, pennsylvania, 4 january 2014. * * * i thank dave fettig and sam schulhofer - wohl for their helpful comments. i ’ d like to use this opportunity to talk about the role of economic research and economists within a reserve bank. my main theme is that, to be successful at their host of responsibilities, reserve banks need economists with a wide range of perspectives and skills. conversely, economists in a variety of fields can enjoy fulfilling and successful careers at reserve banks. i ’ ll illustrate my points by using examples from my own institution, the federal reserve bank of minneapolis. the views that i express today are my own and not necessarily those of others in the federal reserve system, including my colleagues on the federal open market committee. my first observation is that, just like economists who work at universities and colleges, many economists within reserve banks spend a great deal of time on independent research. many reserve banks – including the minneapolis federal reserve bank – have found that, especially over the longer term, this self - directed research has the power to create valuable new insights into important public policy questions. for example, back in the 1990s, harold cole and lee ohanian – then at the minneapolis fed – developed an exciting and important new way to think about the slow recovery during the great depression. 1 this work in economic history has turned out to be a valuable resource for many who are thinking about the current slow recovery. over the past four decades in minneapolis, we have found that, to be effective, independent research should follow the usual rules of academic economics. more specifically, economists must be free to pursue any question, use any available tools and arrive at any answer. the quality of those answers is ultimately measured by rigorous academic peer review, not by internal managerial judgment. so, university and reserve bank jobs are not all that different in terms of the role of independent research. what distinguishes academic jobs from reserve bank jobs for economists is how they spend their non - research time. economists with academic jobs spend most of their non - research time teaching. economists with reserve bank jobs spend most of their non - research time supporting public policy work. as i stated at the outset, my main theme today is that public policy work in a reserve bank relies on a much wider variety

bolstering effect of lower commodity prices. imported inflation might also be depressed as foreign producers cut prices in reaction to weakening global growth. the second circumstance is if there is a succession of supply shocks that keep inflation low for a long period and cause firms and households to revise down their inflation expectations. in that situation, low oil and commodity prices can have “ second round effects ” as lower expectations feed into wage bargaining and price setting, thereby affecting core inflation. then, the effect of supply shocks becomes more similar to demand shocks. in both cases, central banks end up facing a situation not of a benign supply shock, but rather of an adverse demand shock that, if left unaddressed, could derail price stability over the medium - term. that would call for a more forceful monetary policy response. importantly, there were signs in the past that such circumstances were present in the euro area. estimating the relative contributions of supply and demand in oil and commodity price dynamics is always complex, but combining evidence from several different sources, both effects appear to have been at play. while supply shocks explain an important part of oil prices over the last year, adverse demand shocks have also increased driven by the slowdown at the global level ( figure 2 ). in that context we have also seen that, while the euro depreciation is contributing to higher import prices in euro, export price inflation in our main trading partners has remained depressed, contributing to weak producer price pressures. this in turn has weighed on the recovery of industrial goods inflation, which is sensitive to global inflation and makes up around a quarter of the consumption basket in the euro area. at the same time, a succession of oil price shocks over recent years has led to a prolonged period of low inflation in the euro area which, at times, has been reflected in declines in measures of inflation expectations. against that backdrop, we have seen a higher risk that a continued period of low inflation – even if supply - driven – could start to have second - round effects and feed into core inflation. in sum, while in general the forces driving global disinflation are ones that should not, over the medium - term, affect central banks ’ ability to deliver price stability, in the euro area the risks were higher that they might not “ wash out ” over time, and might instead feed into core inflation. for that reason, they became relevant for our monetary policy. bis central bankers ’ speeches the role of domestic inflation these global factors, however, have