Is there evidence of the new economy in the data?
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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