American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective
American Economic Journal: Macroeconomics
(pp. 69–101)
Abstract
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.Citation
Bundick, Brent, and Nicolas Petrosky-Nadeau. 2026. "From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective." American Economic Journal: Macroeconomics 18 (1): 69–101. DOI: 10.1257/mac.20210381Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- J64 Unemployment: Models, Duration, Incidence, and Job Search