A Dual Mandate Can Support Price Stability

Brent Bundick and Nicolas Petrosky-Nadeau

No 2026-17, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the benefits associated with history-dependent policy frameworks.

Keywords: inflation; monetary policy; dual mandate (search for similar items in EconPapers)
JEL-codes: E32 E52 J64 (search for similar items in EconPapers)
Pages: 36
Date: 2026-08-26
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DOI: 10.24148/wp2026-17

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