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

  • Rudebusch, Glenn D.

    ()

    (Federal Reserve Bank of San Francisco)

  • Williams, John C.

    ()

    (Federal Reserve Bank of San Francisco)

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.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2014-14.

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Length: 26 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:fip:fedfwp:2014-14
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  2. Robert G. Valletta, 2013. "Long-term unemployment: what do we know?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb4.
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