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From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective

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Abstract

The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy that stabilizes employment “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to firms’ expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher inflation, employment, and nominal policy rates on average and also produces better outcomes during a zero lower bound episode. Our model suggests that the FOMC’s reinterpretation of its employment mandate could alter the business cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.

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  • Brent Bundick & Nicolas Petrosky-Nadeau, 2021. "From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective," Research Working Paper RWP 21-04, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:92916
    DOI: 10.18651/RWP2021-04
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    More about this item

    Keywords

    Monetary Policy; Equilibrium Unemployment; Nominal Rigidities; Zero Lower Bound;
    All these keywords.

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • A10 - General Economics and Teaching - - General Economics - - - General

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