Full text of Working Papers (Federal Reserve Bank of Richmond) : The New Neoclassical Synthesis and the Role of Monetary Policy, Working Paper 98-05

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Working Paper Series

The New Neoclassical Synthesis and the
Role of Monetary Policy

WP 98-05

Marvin Goodfriend
Federal Reserve Bank of Richmond
Robert G. King
University of Virginia

This paper can be downloaded without charge from:
http://www.richmondfed.org/publications/

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Figure 1: Hours, Employment, and Utilization
Aggregate Hours
3
2

Percent

1
0

-1
-2
-3
-4
60

63

66

69

72

Output (Reference Series)

75

78

81

84

87

90

93
Time

Employment (total hours)

Unemployment Rate

3
2

Percent

1
0
-1
-2
-3
-4
60
63
66
Output (Reference Series)

69
72
Unemployment

75

78

81

84

87

90

93
Time

Average Weekly Hours

3
2
Percent

1
0
-1
-2
-3
-4
60
63
66
Output (Reference Series)

69

72
75
78
Employment (average hours)

81

84

87

90

93
Time

Capacity Utilization

6
4
Percent

2
0
-2
-4
-6
-8
60

63

66

Output (Reference Series)

69

72

75

Capacity Utilization

78

81

84

87

90

93
Time

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Figure 2: Inflation and Unemployment
16

Raw Series

14
12

Percent

10
8
6
4
2
0
-2
52

55

58

Raw Inflation

61

64

67

70

73

76

79

82

85

88

91

94
Time

Raw Unemployment

Business Cycle Components

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3

Percent

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1
0
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52

55

58

61

Bus Cycle Inflation

64

67

70

73

76

79

82

85

88

91

94
Time

Bus Cycle Unemployment

Trend Components

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9
8

Percent

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6
5
4
3
2
1
0
52

55
Trend Inflation

58

61

64

Trend Unemployment

67

70

73

76

79

82

85

88

91

94
Time

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Figure 3: THE EFFECTS OF STEADY-STATE
INFLATION
A: Ratio of P to P*

B: Marginal Markup

1.020
1.010
Marginal Markup

1.000
P/P*

0.990
0.980
0.970
0.960
0.950
0.940
0.930
-2

-1

0

1

2

3

4

5

6

7

8

9 10
Inflation

-2

C: Average Markup

-1

0

1

2

3

4

5

6

7

8

9 10
Inflation

7

8

9 10
Inflation

D: Relative Price Distortion

1.001

1.106
1.105
1.104
1.103
1.102
1.101
1.100
1.099
1.098
1.097

1.000
Relative Price Distortion

Average Markup

1.160
1.150
1.140
1.130
1.120
1.110
1.100
1.090
1.080
1.070
1.060

0.999
0.998
0.997
0.996
0.995
0.994

-2

-1

0

1

2

3

4

5

6

7

8

9 10
Inflation

-2

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0

1

2

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Full text of Working Papers (Federal Reserve Bank of Richmond) : The New Neoclassical Synthesis and the Role of Monetary Policy, Working Paper 98-05

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