A Bayesian interpretation of the Federal Reserve's dual mandate and the Taylor Rule

Bluford H. Putnam and Samantha Azzarello

Review of Financial Economics, 2012, vol. 21, issue 3, 111-119

Abstract: When the Federal Reserve was established by the US Congress in 1913, its charter mandated that the new central bank “promote an elastic currency” and the institution was given extraordinary powers to serve as a lender of last resort to the banking system. Congress was reacting to the cycle of financial panics that had beset the country since the Civil War and had worsened with the Panic of 1907. Congress sought to find a remedy to prevent runs on banks turning into full-fledged financial crises. The term “elastic” in the opening words of the charter was intended to underscore the need for a robust banking system that could withstand shocks and not collapse upon itself. There was no mention whatsoever of a dual mandate of promoting price stability and encouraging full employment.

Keywords: Dual mandate; Federal Reserve; Bayesian inference; Inflation; Employment (search for similar items in EconPapers)
JEL-codes: E40 E43 E52 E61 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:21:y:2012:i:3:p:111-119

DOI: 10.1016/j.rfe.2012.06.005

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