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Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate

Andrea Ajello, Isabel Cairo, Vasco Cúrdia (), Thomas Lubik () and Albert Queraltó
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Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 2020-066, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of hitting the effective lower bound during a downturn. This paper studies how these factors complicate the attainment of the objectives specified in the Federal Reserve’s dual mandate in the context of a DSGE (dynamic stochastic general equilibrium) model, taking into account risk-management considerations. We find that these challenges may warrant pursuing more accommodative policy than would be desirable otherwise. However, such accommodative policy could be associated with concerns about risks to financial markets.

Keywords: U.S. monetary policy; Optimal policy; Discretion (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 E61 (search for similar items in EconPapers)
Pages: 33
Date: 2020-08-27
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-66

DOI: 10.17016/FEDS.2020.066

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