Working Paper: NBER ID: w31003
Authors: Narayana R. Kocherlakota
Abstract: This paper uses evidence from the Federal Open Market Committee’s Summary of Economic Projections to show that US monetary policymakers have objectives over unemployment and inflation outcomes that are not well-approximated through a conventional quadratic loss function. Rather, policymakers derive material costs (benefits) from overshooting (undershooting) their long-run inflation and unemployment goals. The trade-off between the resultant downward tilts in unemployment and inflation played a key role in shaping the evolution of monetary policy choices since the Great Recession.
Keywords: No keywords provided
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. monetary policymakers do not operate under a conventional quadratic loss function (E19) | they have an additional non-quadratic loss term in their objective functions (C51) |
| the additional non-quadratic loss term in their objective functions (C51) | policymakers derive significant costs and benefits from overshooting or undershooting their long-run inflation and unemployment targets (E61) |
| the tradeoff between inflation and unemployment (E31) | policymakers' choices are influenced by a downward tilt in both objectives (D72) |
| the Bernanke Fed was influenced by a hawkish inflation tilt (E52) | the decisions made by the Bernanke Fed (E58) |
| the Yellen Fed was shaped by a dovish unemployment tilt (E69) | the decisions made by the Yellen Fed (E52) |
| the Powell Fed's decisions have been guided by both considerations (E58) | the decisions made by the Powell Fed (E58) |