A Dual Mandate Can Support Price Stability

Since employment dynamics are persistent, a central bank's dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the benefits associated with history-dependent policy frameworks.

Suggested citation:

Bundick, Brent and Nicolas Petrosky-Nadeau. 2026. "A Dual Mandate Can Support Price Stability." Federal Reserve Bank of San Francisco Working Paper 2026-17. https://doi.org/10.24148/wp2026-17