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The New Economy and the Challenges for Macroeconomic Policy

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Stephen G. Cecchetti

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Abstract

The accelerated introduction of information and communications technology into the economy has created numerous challenges for policymakers. This paper describes this New Economy and then proceeds to examine difficulties created for policymakers. The increased flexibility of the new economy argues against trying to use fiscal policy for stabilization and creates both immediate and long-term difficulties for monetary policy. Immediate difficulties concern the problems associated with estimating potential output when the productivity trend is shifting. During periods of transition, it is extremely difficult to distinguish permanent from transitory shifts in output growth, and adjust policy correctly. In the long-term, central banks must face the prospect of a significant decline in the demand for their liabilities, and a resulting loss of their primary interest rate policy instrument. The disappearance of the demand for central bank money for interbank settlement seems very unlikely, and so this concern seems unwarranted.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8935.

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Date of creation: May 2002
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Handle: RePEc:nbr:nberwo:8935

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E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Arturo Estrella, 2002. "Securitization and the efficacy of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 243-255. [Downloadable!]
  2. Friedman, Benjamin M, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Blackwell Publishing, vol. 3(2), pages 261-72, July. [Downloadable!] (restricted)
  3. J. Bradford DeLong & Lawrence H. Summers, 2001. "The 'new economy' : background, historical perspective, questions, and speculations," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 29-59. [Downloadable!]
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  4. Robert J. Gordon, 2000. "Does the "New Economy" Measure up to the Great Inventions of the Past?," NBER Working Papers 7833, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc. [Downloadable!]
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  6. Charles Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," FMG Special Papers sp125, Financial Markets Group. [Downloadable!] (restricted)
  7. Benjamin M. Friedman, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," NBER Working Papers 7955, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cette, G. & Pfister, C., 2003. "The Challenges of the "New Economy" for Monetary Policy," Documents de Travail 100, Banque de France. [Downloadable!]
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  2. Gilbert Cette & Christian Pfister, 2004. "Challenges of the “New Economy” for Monetary Policy," International Productivity Monitor, Centre for the Study of Living Standards, vol. 8, pages 27-36, Spring. [Downloadable!]
  3. Haydar Akyazi & Seyfettin Artan, 2006. "Reflections of the New Economy on the Monetary Policy and Central Banking," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Proceedings of the Conference on Human and Economic Resources, pages 373-387 Izmir University of Economics. [Downloadable!]
    Other versions:
  4. Haydar, Akyazi & Seyfettin, Artan, 2006. "The reflections of new economy on monetary policy and central banking," MPRA Paper 603, University Library of Munich, Germany, revised 27 Sep 2006. [Downloadable!]
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