Monetary Policy Tradeoffs and the Federal Reserve'S Dual Mandate

33 Pages Posted: 2 Sep 2020 Last revised: 11 Sep 2020

See all articles by Andrea Ajello

Andrea Ajello

Board of Governors of the Federal Reserve System

Isabel Cairo

Board of Governors of the Federal Reserve System

Vasco Cúrdia

Federal Reserve Bank of San Francisco

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Albert Queralto

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of hitting the effective lower bound during a downturn. This paper studies how these factors complicate the attainment of the objectives specified in the Federal Reserve’s dual mandate in the context of a DSGE (dynamic stochastic general equilibrium) model, taking into account risk-management considerations. We find that these challenges may warrant pursuing more accommodative policy than would be desirable otherwise. However, such accommodative policy could be associated with concerns about risks to financial markets.

JEL Classification: E32, E52, E58, E61

Suggested Citation

Ajello, Andrea and Cairo, Isabel and Cúrdia, Vasco and Lubik, Thomas and Queralto, Albert, Monetary Policy Tradeoffs and the Federal Reserve'S Dual Mandate (August, 2020). FEDS Working Paper No. 2020-66, Available at SSRN: https://ssrn.com/abstract=3684906 or http://dx.doi.org/10.17016/FEDS.2020.066

Andrea Ajello (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Isabel Cairo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Vasco Cúrdia

Federal Reserve Bank of San Francisco ( email )

101 Market Street
MS 1130
San Francisco, CA 94105
United States
(415) 977-3624 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/staff.php?vcurdia

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Albert Queralto

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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