Challenges of the “New Economy” for Monetary Policy

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.