I have a new article on understanding QE3 at The American Prospect which I hope you check out.

Several people have commented on it already, but I want to note that Narayana Kocherlakota is now in favor of more monetary action.

To put this in perspective, here's the September 21st 2011 FOMC statement: "Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time." Kocherlakota also voted against this action in August.

At this time, he was making arguments that since "the U.S. economy has experienced large increases in the federal budget deficits, contributing substantially to the overall federal debt" and "In response to the recession, the federal government extended the duration of unemployment insurance benefits," this could have caused the natural rate of unemployment to shift so that "the implied u* is 8.7 percent." That the natural rate of unemployment was incredibly high was an argument Kocherlakota had been pushing for some time: here he is in August 2010 arguing mismatch had pushed the NAIRU up 3 percentage points in this recession.

A month later, in the November 2nd, 2011 FOMC statement, there was the first dissent on behalf of the unemployed and in favor of more easing during the entire Great Recession. "Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time."

Now, almost a year later, Kocherlakota is arguing a version of the Evans rule: "As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent." He explicitly credits Evans with this rule, noting "President Charles Evans of the Federal Reserve Bank of Chicago has also proposed what I’m calling a liftoff plan...Those familiar with his plan will see that my thinking has been greatly influenced by his. This is perhaps hardly surprising, since he sits next to me at every FOMC meeting!"

Even though this is a relatively conservative version of the Evans rule, there are two important consequences. The first is that dissent is now taking place on Evans' terms. During 2010-2011 the debate, especially on the hawks side, was about "structural unemployment" and whether or not the Federal Reserve should accept that unemployment should remain well above 8%. Now it is about what the Fed is willing to tolerate to get unemployment below 6%. This is a major sea change.

This also takes away the intellectual firepower of the monetary hawks. Kocherlakota is an academic's academic, and his arguments were always based in the dense mathematics of job search models and job-opening ratios. Now that he's moved over to Evans' framework on tradeoffs, it isn't clear that there will be anyone at the regional levels of the Federal Reserve producing numbers arguing that we should focus mainly on how to match workers to job openings. That's a major victory towards a more sensible monetary policy going forward.

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