Working Paper

A Dual Mandate Can Support Price Stability

Abstract: Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the stabilization benefits associated with history-dependent policy frameworks.

JEL Classification: E32; E52; J64;

https://doi.org/10.18651/RWP2026-10

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2026-08-31

Number: RWP 26-10