A wedge in the dual mandate: Monetary policy and long-term unemployment

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 trade-offs 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. Published by Elsevier Inc.