RWP 21-04, July 2021; updated October 2023
We analyze the effects of a monetary policy that stabilizes “shortfalls” rather than “deviations” of employment from its maximum level. A shortfalls-stabilization rule leads to expectations of more accommodative policy in expansions, raising average inflation and nominal rates. These effects are significantly amplified by incorporating history dependence in labor markets, a feature in labor-search frameworks. In a calibrated model of labor-search frictions and nominal rigidities, the adoption of a shortfalls rule raises average inflation and nominal policy rates by 90 basis points, reduces the likelihood of a binding zero lower bound, and implies a steeper and nonlinear 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