From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective

Brent Bundick and Nicolas Petrosky-Nadeau

American Economic Journal: Macroeconomics, 2026, vol. 18, issue 1, 69-101

Abstract: We analyze the effects of a monetary policy that stabilizes "shortfalls" rather than "deviations" of employment from its maximum level. A shortfalls-stabilization rule leads to expectations of more accommodative policy in expansions, raising average inflation and nominal rates. These effects are significantly amplified by incorporating history dependence in labor markets, a feature in labor-search frameworks. In a calibrated model of labor-search frictions and nominal rigidities, the adoption of a shortfalls rule raises average inflation and nominal policy rates by 90 basis points, reduces the likelihood of a binding zero lower bound, and implies a steeper and nonlinear Phillips curve.

JEL-codes: E24 E31 E43 E52 E58 J64 (search for similar items in EconPapers)
Date: 2026
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Working Paper: From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective (2021)
Working Paper: From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective (2021)
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DOI: 10.1257/mac.20210381

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