The Global Effects of the New Economy: A Dynamic CGE Analysis

A critical question facing the global economy is whether the new technology underlying the information revolution will be persistent and translate into higher economic growth in the United States and other countries around the world. A key component of this happening will be government and legislative action to provide incentives that facilitate innovation, investments in human capital, and the opening up the further development of capital markets to mobilize the financing necessary to support new technology innovations and implementation. In our paper, we make a case that the new economy is unique and holds out promise of accelerating growth around the world. Using a simplified three sector dynamic CGE growth model, we show that evidence of the productivity impact of the new economy is already evident in the United States. Further spillover effects could induce higher sustained growth rates in other countries of the world that aggressively encourage the new economy with policies that facilitate the adoption of information technology, human capital development, and openness to investment and capital flows. A three sector neo-classical growth model is calibrated to the path of the economy for the year 1987.2 The model is of the Ramsey-Cass-Koopman’s variety with infinitely lived households, three factors of production (labor, capital, land) and three goods, a home good, an agricultural good, and the rest of the economy. Labor and capital are mobile, while land is sector specific. Capital and land are the two assets in the model. Each sector of the economy is permitted to have a different rate of growth in TFP with TFP in agriculture exceeding that of the rest of the economy, as shown in the data. The rest of the economy, and agriculture are open, but foreign (domestic) households are not permitted to have claims on other country assets. Rates of growth in factor productivity, and factor shares are taken from Jorgenson for the United States except that data on sectoral total factor productivity (TFP) growth rates were computed for the years 1987- 1992. The rate of time discount and other parameters are taken from various other sources (see Roe, 2000).