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A Dual Mandate for the Federal Reserve: The Pursuit of Price Stability and Full Employment

  • Willem Thorbecke


    (Department of Economics, George Mason University
    Jerome Levy Economics Institute)

The Federal Reserve currently pursues both price stability and full employment. Congress is debating whether to make price stability the overriding goal of monetary policy. This paper argues against such a change for several reasons. First, under the current mandate the U.S. has experienced low inflation and low unemployment, while many inflation-targeting countries have experienced double-digit unemployment. Second, the costs of unemployment are substantial while the costs of moderate inflation are probably not large. Third, central bankers need prodding to pursue goals other than inflation. Fourth, if the price level is not free to adjust, an adverse supply shock can cause large increases in unemployment.

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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 28 (2002)
Issue (Month): 2 (Spring)
Pages: 255-268

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Handle: RePEc:eej:eeconj:v:28:y:2002:i:2:p:255-268
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