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Is there evidence of the new economy in the data?

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  • Michael A. Kouparitsas

Abstract

The popular new economy theory argues that the U.S. economy can now grow at rates much greater than in the past without igniting higher levels of price inflation. At the core of the new economy paradigm is the belief that the U.S. Economy experienced an innovation in the 1990s that raised its so-called constant-inflation trend growth rate. According to its advocates, evidence of the new economy comes from the fact that the U.S. economy experienced relatively strong output growth and low levels of price inflation over the 1990s. This paper evaluates the new economy theory by formally testing whether the growth rate of the constant-inflation trend changed significantly over the 1990s. I find that there is no evidence of the new economy when the constant-inflation trend is estimated using recent GDP and CPI data. My results suggest that the robust economy expansion of the 1990s was not due to a increase in the trend growth rate but rather a cyclical expansion and a level increase in the trend.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-99-22.

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Date of creation: 1999
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Handle: RePEc:fip:fedhwp:wp-99-22

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Keywords: Economic conditions - United States ; Inflation (Finance) ; Business cycles;

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  1. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, vol. 49(3), pages 741-51, May.
  2. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  3. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  4. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
  5. Kenneth N. Kuttner, 1993. "An unobserved-components model of constant-inflation potential output," Working Paper Series, Macroeconomic Issues 93-2, Federal Reserve Bank of Chicago.
  6. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
  7. Harvey, A C & Todd, P H J, 1983. "Forecasting Economic Time Series with Structural and Box-Jenkins Models: A Case Study," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(4), pages 299-307, October.
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Cited by:
  1. Jack L. Hervey & Loula S. Merkel, 2000. "A record current account deficit: causes and implications," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-13.

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