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More US public debt could help monetary policy in long run

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https://www.reuters.com/article/2015/09/08/usa-fed-kocherlakota-idUSL1N11E2DN20150908

More US public debt could help monetary policy in long run -Fed official

Sept 8

A top U.S. Federal Reserve official on Tuesday floated a potentially controversial proposal to help keep America's economy more stable: The federal government could issue more debt.

Narayana Kocherlakota, president of the Minneapolis Fed, said bond market data suggests that the ideal inflation-adjusted rates of interest in the U.S. economy have fallen in recent decades.

This is important because it means the Fed's own target for interest rate policy will tend to be lower, raising the risk that the Fed finds itself in a situation where it would like to slash rates but can only cut them modestly before hitting the "zero lower bound."

Near-zero rates also raise the risk of encouraging people to over borrow, setting up instability in the form of financial booms and busts.

"Fiscal policymakers can mitigate these risks by choosing to maintain higher levels of public debt than markets currently anticipate," Kocherlakota said in remarks prepared for delivery at Northwestern University in the Chicago suburb of Evanston.

Kocherlakota, who did not comment on the current outlook for the U.S. economy and monetary policy, said he was not advocating a run-up in public borrowing. He said higher debt levels would imply costs to society.

"Younger workers (and those who are yet to be born) have to pay the taxes to fund this extra debt issuance," he said, adding that "balancing these gains versus losses is clearly a job for the fiscal authority, not for monetary policymakers like me."

"I am simply pointing to two key benefits associated with such an increase," Kocherlakota said, referring to more effective monetary policy and less risk of financial instability.