Unemployment and Inflation Dynamics in the Monetary Policy Armamentarium

Abstract: An armamentarium comprises the resources assembled for a particular purpose, such as treating an illnesses or fighting a battle. A central bank uses its armamentarium to conduct monetary policy. The paper’s main points are (1) In a cyclical recovery, unemployment glides downward at a low rate. This rate was roughly uniform across historical recoveries since 1948. (2) In the recovery from 2009 through 2019, the natural rate of unemployment declined along with the actual unemployment rate, as evidenced by the fact that inflation was low and stable during that period. (3) The labor market during 2020 remained significantly tighter than total unemployment would suggest. (4) Low and steady inflation became firmly anchored during the expansion of 2009- 2019, but anchoring declined during the turbulence of the pandemic. The diminished anchoring of inflation may have been helpful in the disinflation that occurred in 2023.

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