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, 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.

Minneapolis Fed President Narayana Kocherlakota

Categorized in : Business

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, fiscal policymakers can mitigate this risk by choosing to maintain higher levels of public debt than markets currently anticipate.

Minneapolis Fed President Narayana Kocherlakota

business