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Fiscal
authorities can ease this problem by issuing more debt,
Minneapolis Fed President Narayana Kocherlakota said in remarks
prepared for delivery in Frankfurt.
Doing so would push up the so-called long-run neutral real
interest rate - the level of borrowing costs appropriate for an
economy with full employment and 2 percent inflation - which
would give the Fed more room to maneuver in the face of what
could be more frequent bouts with near-zero interest rates.
"I want to be clear at the outset that I am not saying that it
is appropriate for fiscal policymakers to increase the long-run
level of public debt," Kocherlakota said. "I am simply pointing
to one benefit associated with such an increase: It allows the
central bank to be more effective in mitigating the impact of
adverse shocks to aggregate demand."
Kocherlakota, who will leave the U.S. central bank at the end of
this year to take a job at the University of Rochester, has
spent the last several years arguing that the Fed should ease
policy further to boost inflation, which has remained stubbornly
below its 2 percent goal.
Thursday's speech - which did not refer to the current economic
outlook or the stance of current monetary policy - took that
out-of-the-mainstream argument further.
While other policymakers have similarly noted that a decline in
the long-run neutral real interest could stymie Fed policy
goals, few if any have suggested so directly that increased
government borrowing could be a solution.
Central banks, Kocherlakota suggested on Thursday, are worried
about the costs of using unconventional tools like bond-buying
programs to stimulate the economy during future bouts with zero
interest rates.
"Given these costs, I anticipate that monetary policy will be
insufficiently accommodative during periods at the nominal
interest rate lower bound, which will lead the economy to
undershoot the (Fed)’s inflation and employment objectives,"
Kocherlakota said. "Fiscal policymakers can mitigate this risk
by choosing to maintain higher levels of public debt than
markets currently anticipate."
(Writing by Ann Saphir; Editing by Leslie Adler)
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