A Bayesian interpretation of the Federal Reserve's dual mandate and the Taylor Rule
When the Federal Reserve was established by the US Congress in 1913, its charter mandated that the new central bank “promote an elastic currency” and the institution was given extraordinary powers to serve as a lender of last resort to the banking system. Congress was reacting to the cycle of financial panics that had beset the country since the Civil War and had worsened with the Panic of 1907. Congress sought to find a remedy to prevent runs on banks turning into full-fledged financial crises. 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.
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- Frank Smets, 2002.
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Springer, vol. 27(1), pages 113-129.
- Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
- Athanasios Orphanides, 2003.
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Finance and Economics Discussion Series
2003-36, Board of Governors of the Federal Reserve System (U.S.).
- Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
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- Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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- John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
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