RWP 21-04, July 2021
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.
JEL Classifications: E32, E52, J64
Bundick, Brent, and Nicolas Petrosky-Nadeau. 2021. “From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective.” Federal Reserve Bank of Kansas City, Research Working Paper no. 21-04, July. Available at External Linkhttps://doi.org/10.18651/RWP2021-04