A wedge in the dual mandate: Monetary policy and long-term unemployment

Glenn Rudebusch and John Williams

Journal of Macroeconomics, 2016, vol. 47, issue PA, 5-18

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 affect price inflation. 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.

Keywords: Optimal monetary policy; Labor market slack (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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Working Paper: A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:47:y:2016:i:pa:p:5-18

DOI: 10.1016/j.jmacro.2015.05.001

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