The New Economy and the Challenges for Macroeconomic Policy

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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.

Published: 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.

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