Macroeconomic Implications of the New Economy

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Macroeconomic Implications of the New Economy

• J. Bradford DeLong
• U.C. Berkeley
• http//www.j-bradford-delong.net
• delong_at_econ.berkeley.edu

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Computer Technology Finally Has a Large Direct,
Measured Effect on Growth...
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But Other Effects May Be as Large...
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Consequences The Decline of the Inventory Cycle?

• As much as 40 of the quarter-to-quarter
  variability of production about trend has been
  due to fluctuations in inventory investment.
• Managers say one of the principal benefits of new
  computer-and-communications technology is better
  inventory control.
• What are the macroeconomic consequences of better
  microeconomic inventory management?

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Consequences A Lower Natural Rate of
Unemployment?

• Use of unemployment as a measure of cyclical
  conditions has gone awry
• in the 1970s, as the natural rate rose.
• in the 1990s, as the natural rate fell.
• Strong time-series correlation between
  productivity growth and the natural rate
• Are real wage aspirations responsible?

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Consequences A Broken Speedometer?

• Roger Ferguson When historical patterns no
  longer apply, place more weight on recent
  experience
• How to guide the economy into the narrow zone in
  which price stability and full employment are
  both attainable?
• The disadvantages of groping given the
  importance of a reputation for prudence

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Consequences Do Traditional Monetary Policy
Tools Break?

• Outside U.S., Japan, Western Europe, yes they do
• Foreign financial institutions and dollarization
• The magnitude of cross-border transactions
• Inside the U.S.
• The unique role of commercial banking reserves in
  the payments system meant that small OMOs had
  large consequences
• So far no sign that this unique role is fading
  away...