Fed’s Dual Mandate: Maximum Employment and Price Stability

Abstract

Abstract In this paper, we look at the dual mandate (price stability and maximum employment) as policy objectives of the central bank (the Fed) and we test mostly the effectiveness of policy instruments on these two ultimate objectives. We start from 1978 to 2008 and then, from 2009 (the year of major changes in monetary policy) to present to measure statistically the capability of the Fed to improve the economy’s cycle and citizens’ wellbeing. OLS and VAR models and at the end some measurements of correlations and causality are used to determine the effectiveness of the policy tools on the two objective variables, price and unemployment. The empirical results show that prices have been drastically affected (inflation and bubbles) by this expansionary monetary policy for so many years, but employment has not been improved. In general, our public policies have generated a social cost that exceeds the social benefits. JEL classification numbers: E52, E58, E4, E44, C52, D6. Keywords: Monetary Policy, Central Banks and Their Policies, Money and Interest Rates, Financial Markets and the Macro-economy, Model Evaluation and Testing, Social Welfare.