[F]irms appear to change prices more frequently than predicted by standard macroeconomic models that have been calibrated to match various features of the macroeconomic business cycle. This is a troubling finding in that it suggests a disconnect between the micro data and macro models that are often used to inform monetary policy analysis. Better reconciliation of the models with the empirical facts of the micro data would be a welcome avenue of additional research, and I would expect our models to improve the more we learn.

But the skill diversity that Ive been emphasizing is valued throughout the Federal Reserve System, not just in Minneapolis. To see this, one need not look any further than the key Research leadership positions around the Federal Reserve System. The Research director in Philadelphia is an economist with expertise in banking. The Research director in Chicago is an economist with expertise in labor economics and industrial organization. The Research director in New York is an economist with expertise in payments systems.

But there is much more work to do. In particular, I think we have just scratched the surface in understanding how developments in one area, such as capital and liquidity requirements for large, complex financial institutions, affect other areas, such as effective monetary policy implementation. We still don't have well developed macro-models that incorporate a realistic financial sector. We don't understand fully how large-scale asset purchase programs work to ease financial market conditionsis it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?

I have discussed three examples of ways the Boston Fed has tried to make unique policy contributions within the Federal Reserve System. Moreover, my footnotes contain citations illustrating that we also make academic contributions by publishing our research on these topics, as well as many other topics that I do not have time to highlight today, in the top economics and finance journals. However, as I hope my remarks have illustrated, we have tried to advance not only diversity of thought in the Federal Reserve System, but also diversity of actions. The work that I have highlighted today illustrates our belief that data-driven research of the type that can appear in major professional journals can also inform and guide policy actions in monetary policy, supervisory policy, financial stability policy, and the economy more broadly. Ultimately, our hope is to make a positive difference in these important areas. Finally, I would add that our work at the Boston Fed has benefitted significantly from our interactions with the rich academic community in New England. Most of the articles I have cited in my footnotes have multiple authors. We value collaboration with the academic community, and there are certainly important topics that would benefit from further academic work and collaboration.

To a remarkable extent, Lars econometric and economic analyses dispense with these auxiliary assumptions. Doing the analysis without those assumptions requires harder math. But heres the true irony. Because the harder math allows us to get rid of the technical assumptions, the harder math gets us much closer to understanding the core implications of economics itself. And I believe that this is exactly why the generalized method of moments has become so widely used in economics and other social sciences. My own experience as a researcher was that persistence was incredibly important. Whenever I came up with a new idea, I was toldby many peoplethat the idea had to be wrong. Time would pass. And many of those same folks would come and tell me that they had decided that the idea was not wrong. Instead, they had a fresh criticismthey had decided that the idea was obvious to the point of banality. For you young researchers out there, thats called winning them over.

To me, the key to crafting monetary policy is placing the theoretical analysis―done by our able staffs of economists using quantitative modeling―within the qualitative context of economic behavior as practiced by businesses, consumers, investors and other players actually operating in the field.

This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy—quite the contrary. This is just monetary policy.

As reported by the Wall Street Journal

 I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science...

I don't want to push this analogy too far. Economics as a discipline differs in important ways from science and engineering; the latter, dealing as they do with inanimate objects rather than willful human beings, can often be far more precise in their predictions

[W]e are nowhere near where we need to be in terms of having a useful, comprehensive macroeconomic model that we can use to get the economy to perform at its peak level. Our current effort is not sophisticated enough to handle the challenges that lie ahead.  A more intensive national research effort in macroeconomics is needed.

Back in the days when I was learning economics and central banking, the General Theory had cast fresh light on old problems. The intellectual contributions were immense. But popularized, bowdlerized, and pressed to extremes, it lost fashion for good reason.

The monetarists – emphasizing old truths in modern clothing – have provided a large service in redressing the balance. It is in pressing the point to an extreme that the danger lies – the impression that only money matters and that a fixed rate of reserve expansion can answer most of the complicated problems of economic policy.

In a way, I suppose full confidence in a simple, unified view of economic policy is a comforting thing: a kind of security blanket in an uncertain world. But Alfred North Whitehead, in a different context, once pointed to the danger: “There are no whole truths; all truths are half truths. It is trying to treat them as whole truths that plays the devil.”

He overstated the case. The practical man cut adrift from our sense of what is the greater truth – distinguishing, if you will, the one-eighth truths from the seven-eighths truths – will soon lose his way. But in assessing those truths, he can never afford to lose sight of the messy reality of the world in which we live.