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The New Economy and the Challenges for Macroeconomic Policy

  • Stephen G. Cecchetti

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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File URL: http://www.nber.org/papers/w8935.pdf
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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
Date of revision:
Publication status: published as Jansen, Dennis W. (ed.) The New Economy and Beyond: Past, Present and Future, Bush School Series in the Economics of Public Policy, vol. 5. Cheltenham, U.K. and Northampton, MA: Elgar, 2006.
Handle: RePEc:nbr:nberwo:8935
Note: ME
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  1. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  2. 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.
  3. Friedman, Benjamin M, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Wiley Blackwell, vol. 3(2), pages 261-72, July.
  4. Robert J. Gordon, 2000. "Does the "New Economy" Measure Up to the Great Inventions of the Past?," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 49-74, Fall.
  5. 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.
  6. Charles Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," FMG Special Papers sp125, Financial Markets Group.
  7. Arturo Estrella, 2002. "Securitization and the efficacy of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 243-255.
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