A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment

Glenn Rudebusch and John Williams

No 2014-14, Working Paper Series from Federal Reserve Bank of San Francisco

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.

Pages: 26 pages
Date: 2014-05-27
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Journal Article: A wedge in the dual mandate: Monetary policy and long-term unemployment (2016)
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DOI: 10.24148/wp2014-14

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