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A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment

Author

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  • Rudebusch, Glenn D.

    () (Federal Reserve Bank of San Francisco)

  • Williams, John C.

    () (Federal Reserve Bank of San Francisco)

Abstract

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.

Suggested Citation

  • Rudebusch, Glenn D. & Williams, John C., 2014. "A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment," Working Paper Series 2014-14, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2014-14
    DOI: 10.24148/wp2014-14
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    References listed on IDEAS

    as
    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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    Cited by:

    1. Boldrin, Michele, 2016. "Comment on “A wedge in the dual mandate: Monetary policy and long-term unemployment”," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 26-32.
    2. Craighead, William, 2016. "Hysteresis in a New Keynesian Model," MPRA Paper 70777, University Library of Munich, Germany.
    3. repec:eee:jpolmo:v:39:y:2017:i:2:p:247-271 is not listed on IDEAS
    4. Albuquerque, Bruno & Baumann, Ursel, 2017. "Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve," Journal of Policy Modeling, Elsevier, vol. 39(2), pages 247-271.
    5. repec:eee:ecmode:v:68:y:2018:i:c:p:273-292 is not listed on IDEAS
    6. Donayre, Luiggi & Panovska, Irina, 2016. "Nonlinearities in the U.S. wage Phillips curve," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 19-43.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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