Are We There Yet? Looking for the New Economy

Over the past decade, questions over the impact of new information technologies on productivity growth trends have played an important role in the formulation of monetary policy, particularly in the United States and Canada. However, formal testing of whether the trend growth rate of aggregate productivity has changed significantly is rare, and the best work done to date appears to reach conflicting conclusions. The recent literature is also silent about our power to detect such changes; that is, the extent of the tradeoff between the size and persistence of a structural change in productivity and probability that the policy analyst might remain ignorant of its existence. This paper examines the existing evidence for a shift in aggregate trend productivity growth and attempts to assess its reliablity as a basis for policy making. First, it formally tests for recent changes in productivity growth trends using a new test for instability at the end of samples. Second, it uses a new real-time data set on aggregate Canadian productivity growth to assess the extent to which data revision complicates inference about trend growth rates. Third, simulations are used to quantify the degree to which the lag in detecting breaks may be affected by the size of the break.