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Challenges of the “New Economy” for Monetary Policy

  • Gilbert Cette

    ()

  • Christian Pfister

    ()

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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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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  1. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  2. Cette, G. & Pfister, C., 2003. "The Challenges of the "New Economy" for Monetary Policy," Working papers 100, Banque de France.
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  18. Jacquinot, P. & Mihoubi, F., 2000. "Modele a anticipations rationnelles de la conjoncture simulee : MARCOS," Working papers 78, Banque de France.
  19. 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.
  20. Crafts, Nicholas, 2002. "The Solow Productivity Paradox in Historical Perspective," CEPR Discussion Papers 3142, C.E.P.R. Discussion Papers.
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  22. 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.
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