Question

The Fed is just one of many Central Banks in the world, however, it is one of the few with a dual mandate system. Most central banks in the world are single-mandate systems, where the Central Bank only needs to achieve stability in prices, but it is up to society and governments to pursue economic growth. Do you think the Fed should move towards a single mandate system, and if yes, should it focus on stable prices or should it focus on maximizing employment growth?

Answer 1

Yes, Fed should move towards a single mandate. That mandate should be price stability. If target inflation rate is met then other goals of the economy are automatically achieved. Low and stable inflation helps the real economy to grow. The mandate of maximum employment is not the right choice for keeping key mandate. This is because the connection between maximum employment and monetary policy is weak and inexact. It is difficult for Fed to have an explicit numerical target for unemployment rate or growth of employment rate. On the other hand the link between monetary policy and price stability is strong and effective in medium and long term.Therefore, target rate for inflation can be set. It can be measured with change in the price index for personal consumption expenditures and can be compared from one year to other.