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Wednesday, May 28, 2014

A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment

Glenn Rudebusch and John Williams:

A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment, by Glenn D. Rudebusch and John C. Williams, Federal Reserve Bank of San Francisco: Abstract In standard macroeconomic models, the two objectives in the Federal Reserve's dual mandate -- full employment and price stability -- are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not a ect price in ation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.

I'll believe the Fed will allow *intentional overshooting* of its inflation target when I see it.

    Posted by on Wednesday, May 28, 2014 at 01:15 PM in Economics, Inflation, Monetary Policy | Permalink  Comments (11)



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