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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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  1. Eriksson, Stefan & Rooth, Dan-Olof, 2011. "Do Employers Use Unemployment as a Sorting Criterion When Hiring? Evidence from a Field Experiment," IZA Discussion Papers 6235, Institute for the Study of Labor (IZA).
  2. Congressional Budget Office, 2014. "The Slow Recovery of the Labor Market," Reports 45011, Congressional Budget Office.
  3. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
  4. Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
  5. Erica L. Groshen & Simon M. Potter, 2003. "Has structural change contributed to a jobless recovery?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Aug).
  6. Manning, Neil, 1994. "Are Higher Long-Term Unemployment Rates Associated with Lower Earnings?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(4), pages 383-97, November.
  7. Congressional Budget Office, 2014. "The Slow Recovery of the Labor Market," Reports 45011, Congressional Budget Office.
  8. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston.
  9. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-28, February.
  10. Llaudes, Ricardo, 2005. "The Phillips curve and long-term unemployment," Working Paper Series 0441, European Central Bank.
  11. David L. Reifschneider & William L. Wascher & David W. Wilcox, 2013. "Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy," Finance and Economics Discussion Series 2013-77, Board of Governors of the Federal Reserve System (U.S.).
  12. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  13. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88, March.
  14. Daniel Aaronson & Bhashkar Mazumder & Shani Schechter, 2010. "What is behind the rise in long-term unemployment?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 28-51.
  15. Kiley, Michael T., 2014. "An Evaluation of the Inflationary Pressure Associated with Short- and Long-term Unemployment," Finance and Economics Discussion Series 2014-28, Board of Governors of the Federal Reserve System (U.S.).
  16. Robert J. Gordon, 2013. "The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery," NBER Working Papers 19390, National Bureau of Economic Research, Inc.
  17. repec:cbo:report:45011 is not listed on IDEAS
  18. Alan B. Krueger & Andreas Mueller, 2011. "Job Search, Emotional Well-Being and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 1-81.
  19. Mark W. Watson, 2014. "Inflation Persistence, the NAIRU, and the Great Recession," American Economic Review, American Economic Association, vol. 104(5), pages 31-36, May.
  20. Neil Manning, 1994. "Are Higher Long‐Term Unemployment Rates Associated With Lower Earnings?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(4), pages 383-397, November.
  21. 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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