Taylor Rule. A Bayesian Interpretation of the Federal Reserve’s Dual Mandate

Blu Putnam and Samantha Azzarello

Chapter 16 in Economics Gone Astray, 2019, pp 219-242 from World Scientific Publishing Co. Pte. Ltd.

Abstract: After the Panic of 1907, the US Congress moved to establish a central bank with the powers to serve as a lender of last resort and prevent runs on banks turning into full-fledged financial crises. The Federal Reserve came into being in 1913, and its charter mandated that the new central bank “promote an elastic currency.” 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. The dual mandate concept emerged after World War II, as the US Congress reflected on the Federal Reserve’s near total abrogation of its assigned duties in the 1930s with its failure to serve as a lender of last resort as had been intended…

Keywords: Economics; Macroeconomics; Monetary Policy; Fiscal Policy; Inflation; Risk Management; Federal Reserve; Quantitative Easing; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E02 E44 E52 E6 G32 (search for similar items in EconPapers)
Date: 2019
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