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Challenges of the “New Economy” for Monetary Policy

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  • Gilbert Cette

    ()

  • Christian Pfister

    ()

Abstract

While much attention has focused on the factors that brought about the so-called new economy, much less attention has been paid to optimal policy responses following the establishment of the new economy. In the third article, Gilbert Cette and Christian Pfister from the Bank of France provide such an analysis for the case of monetary policy. They state that the term ‘new economy’ embodies both an acceleration in productivity growth and a disinflationary effect. Central banks can respond to the new economy in several ways in attempting to meet their short-term growth objectives and longer-term inflation objectives. In the long term, monetary policy is most effective in achieving its objectives when the inflation target is changed in response to the new economy and when the monetary authority attempts to stabilize both inflation and output. In the short term, however, when uncertainties regarding the existence of the new economy are present, caution is called for in changing the assessment of the potential growth rate and the inflation target.

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Bibliographic Info

Article provided by Centre for the Study of Living Standards in its journal International Productivity Monitor.

Volume (Year): 8 (2004)
Issue (Month): (Spring)
Pages: 27-36

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Handle: RePEc:sls:ipmsls:v:8:y:2004:3

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Related research

Keywords: Monetary Policy; New Economy; Inflation; Inflation Targeting; Central Bank; Monetary Authority; Taylor Rule; Total Factor Productivity;

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References

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  1. Gilbert Cette & Christian Pfister, 2003. "The challenges of the "new economy" for monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 213-233 Bank for International Settlements.
  2. Stephen G. Cecchetti, 2002. "The New Economy and the Challenges for Macroeconomic Policy," NBER Working Papers 8935, National Bureau of Economic Research, Inc.
  3. Bruce T. Grimm & Brent R. Moulton & David B. Wasshausen, 2005. "Information-Processing Equipment and Software in the National Accounts," NBER Chapters, in: Measuring Capital in the New Economy, pages 363-402 National Bureau of Economic Research, Inc.
  4. Dale W. Jorgenson, 2001. "Information Technology and the U. S. Economy," Harvard Institute of Economic Research Working Papers 1911, Harvard - Institute of Economic Research.
  5. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  6. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.).
  7. Ho, Mun & Jorgenson, Dale & Stiroh, Kevin, 2002. "Projecting Productivity Growth: Lessons from the U.S. Growth Resurgence," Discussion Papers dp-02-42, Resources For the Future.
  8. Nicholas Oulton, 2001. "ICT and productivity growth in the United Kingdom," Bank of England working papers 140, Bank of England.
  9. Cette, Gilbert & Mairesse, Jacques & Kocoglu, Yusuf, 2005. "ICT diffusion and potential output growth," Economics Letters, Elsevier, vol. 87(2), pages 231-234, May.
  10. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 115-136, Fall.
  11. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," Economics Working Paper Archive 450, The Johns Hopkins University,Department of Economics.
  12. Cecchetti, Stephen G, 2000. "Making Monetary Policy: Objectives and Rules," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 43-59, Winter.
  13. Robert E. Litan & Alice M. Rivlin, 2001. "Projecting the Economic Impact of the Internet," American Economic Review, American Economic Association, vol. 91(2), pages 313-317, May.
  14. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society.
  15. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
  16. Crafts, Nicholas, 2002. "The Solow Productivity Paradox in Historical Perspective," CEPR Discussion Papers 3142, C.E.P.R. Discussion Papers.
  17. Jacquinot, P. & Mihoubi, F., 2000. "Modele a anticipations rationnelles de la conjoncture simulee : MARCOS," Working papers 78, Banque de France.
  18. Gordon, Robert J, 2000. "Does the 'New Economy' Measure up to the Great Inventions of the Past?," CEPR Discussion Papers 2607, C.E.P.R. Discussion Papers.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. Barbara M. Fraumeni, 2001. "E-Commerce: Measurement and Measurement Issues," American Economic Review, American Economic Association, vol. 91(2), pages 318-322, May.
  21. Gordon, Robert J, 2002. "Technology and Economic Performance in the American Economy," CEPR Discussion Papers 3213, C.E.P.R. Discussion Papers.
  22. Kevin J. Stiroh, 2001. "What drives productivity growth?," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 37-59.
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Citations

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Cited by:
  1. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements.
  2. Antipa, P. & Cette, G. & Frey, L. & Lecat, R. & Vigna, O., 2008. "Recent trends in productivity: structural acceleration in the euro area and deceleration in the United States?," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 11, pages 33-50, Spring.
  3. Cette, Gilbert & Mairesse, Jacques & Kocoglu, Yusuf, 2005. "Effets de la diffusion des technologies de l’information sur la croissance potentielle et observée," L'Actualité Economique, Société Canadienne de Science Economique, vol. 81(1), pages 203-230, Mars-Juin.
  4. Hildebrandt, Antje & Breitenfellner, Andreas, 2006. "High Employment with Low Productivity? The Service Sector as a Determinant of Economic Development," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 110–135.

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