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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

Article Citation

  • 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 Link


Brent Bundick

Sr. Research and Policy Advisor

Brent Bundick is a Senior Research and Policy Advisor in the Economic Research Department of the Federal Reserve Bank of Kansas City. He rejoined the Department in 2014 after com…