2  BIS central bankers’ speeches  In this setting, even with inflation concerns entirely set aside, monetary policy faces a tradeoff. Consider a situation in which unemployment is above target.
A more accommodative policy has the usual benefit of lowering expected unemployment and thus reducing the expected shortfall term in the objective function.If, however, it also raises the conditional variance of the unemployment rate via an elevated-FMV channel – thereby increasing the risk term in the objective function – then there is a cost to be weighed alongside the benefit.