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Federal Reserve Bank of San Francisco
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A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment
Glenn D. Rudebusch
John C. Williams
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.


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Glenn D. Rudebusch & John C. Williams, A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment, Federal Reserve Bank of San Francisco, Working Paper Series 2014-14, 27 May 2014.
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DOI: 10.24148/wp2014-14
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