The collapse of an asset bubble will not necessarily lead to higher unemployment as long as monetary policy is loose enough, a top Federal Reserve Bank official said on Friday.
But a central bank that has already lowered interest rates to zero may be unable to deliver adequately accommodative policy, and unemployment may rise, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said in prepared remarks for delivery at an academic conference in Marseilles.
Kocherlakota touched neither upon the U.S. economic outlook nor current monetary policy in his speech. An unusually strong disclaimer, he said his paper was only meant to explore a new economic model and contains "no information about my own thinking about current policy."
Since December 2008, the U.S. central bank has kept short-term interest rates near zero and has bought about $2 trillion in mortgage- and U.S.-government-backed debt to lower borrowing rates still further.
But that has not been enough to bring down persistently high unemployment, which in February registered 8.9 percent. Meanwhile, median U.S. home prices -- which soared before the crisis hit -- sank to the lowest since December 2003.
"The collapse of a bubble need have no impact on the economy, as long as the central bank lowers r* sufficiently," he wrote, using economists' shorthand for the real interest rate. "With insufficiently accommodative monetary policy (generated perhaps by the zero lower bound on nominal interest rates), the bubble collapse can lead to increases in unemployment."
In one of the paper's more surprising claims, Kocherlakota suggested that extending unemployment benefits -- sometimes seen as adding to the jobless rate because it can discourage those receiving benefits from actively seeking jobs -- actually reduces it.
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