The Challenges of the "New Economy" for Monetary Policy

The advent and spread of information and communication technologies (ICTs) increase potential output growth . It is uncertain to what extent and for how long they do so. We use the term "new economy" (NE) to describe the acceleration in potential output growth and the attendant and partly temporary slowdown in inflation. Assessing the NE is however a complicated and delicate task. The impact of the NE on the conduct of monetary policy may differ depending on the time scale. In a long-run perspective, the central bank could capitalise on the NE to set lower inflation targets. In the short to medium term, central banks should be cautious when identifying changing patterns in potential output growth, as temporary errors in appreciation may have an asymmetrical impact on economic stability: the production instability that could result from central banks mistakenly perceiving the advent of a NE would be greater than that generated by the failure to recognise a genuine rise in potential output growth.Monetary policy ; Productivity ; New economy ; Uncertainty ; Measurement issues.

Trends in "structural" productivity levels in the major industrialized countries.

Estimating returns to hours worked and the employment rate provides us with an original interpretation of changes in US productivity and other industrialized countries' catch-up with US productivity levels over recent decades.Productivity ; Employment rate ; Working time ; Technical frontier.

A comparison of structural productivity levels in the major industrialised countries

Hourly labour productivity levels in a number of European countries are thought to be very close to, or possibly even higher than the level ‘observed’ in the United States. At the same time, however, there are big differentials between hours worked and/or employment rates in these countries and in the United States. Frequent mention is also made of the theory of diminishing returns to hours worked and the employment rate. The object of the analysis proposed here is to adjust the ‘observed’ levels of hourly productivity for the effect of the differentials (with the United States) in the hours worked and/or employment rates of several categories of the population of working age in order to calculate ‘structural’ hourly productivity. The results obtained confirm the diminishing returns to hours worked and the employment rate (especially where young and elderly people are concerned). The level of ‘structural’ hourly productivity appears to be highest in the United States, suggesting that the differential between per capita GDP in the European countries and in the United States is attributable to hours worked and employment rates being at lower levels, and also to lower ‘structural’ hourly productivity.Productivity; Employment rates; Working time; ICTs; Well-being

The rocky ride of break-even inflation rates

The correlation matrix between break-even inflation rate movements and real interest rate movements across several countries shows puzzling features. Correlation is significantly positive for nearly all cross-border pairs whereas it is nil, positive or negative unsystematically within countries. By means of a correlation matrix decomposition, we give an explanation for this puzzle.Inflation-linked bonds

Capital Utilisation and Retirement

This empirical analysis aims at assessing the effect of the economic climate and the intensity of capital utilisation on companies' capital retirement behaviour. It is conducted using individual company data, as well as original data on the degree of utilisation of production factors. The sample includes 6,998 observations over the period 1996-2008. This database is, to our knowledge, unique for the empirical analysis of the intensity of capital utilisation on firms' capital retirement behaviour. We adjust for endogeneity biases by means of instrumental variables. The main results obtained from the estimation of capital retirement models may be summarised as follows: i) The retirement rate decreases with the variations in cyclical pressures measured by the changes in output and the workweek of capital; this relation corresponds to a countercyclical decelerator effect on capital retirement; ii) The capital retirement rate increases with the structural intensity of capital utilisation; this effect, which corresponds to a wear and tear one, is nevertheless small compared to the decelerator one; iii) The profit rate does not have a significant impact on the retirement rate. Compared with the existing literature, here mainly Mairesse and Dormont (1985), the contribution of these results is to show, through the use of unique survey data, that the effect of the intensity of capital utilisation on capital retirement is structurally positive, via a wear and tear effect, and cyclically negative, via a decelerator effect which completes that already taken into account via the effect of changes in value added.Capital; Capital measure; Capital retirement; Capital utilisation

Productivity Growth and Levels in France, Japan, the United Kingdom and the United States in the Twentieth Century.

This study compares labor and total factor productivity (TFP) in France, Japan, the United Kingdom and the United States in the very long (since 1890) and medium (since 1980) runs. During the past century, the United States has overtaken the United Kingdom and become the leading world economy. During the past 25 years, the four countries have also experienced contrasting advances in productivity, in particular as a result of unequal investment in information and communication technology (ICT). The past 120 years have been characterized by: (i) rapid economic growth and large productivity gains in all four countries; (ii) a long decline in productivity in the United Kingdom relative to the United States, and to a lesser extent also relative to France and Japan, a relative decline that was interrupted by the second world war (WW2); (iii) the remarkable catching-up to the United States by France and Japan after WW2, interrupted in the case of Japan during the 1990s. Capital deepening (at least to the extent this can be measured) accounts for a large share of the variations in performance; increasingly during the past 25 years, this has meant ICT capital deepening. However, the capital contribution to growth varies considerably over time and across the four countries, and it is always less important, except in Japan, than the contribution of the various other factors underlying TFP growth, such as, among others, labor skills, technical and organizational changes and knowledge spillovers. Most recently (in 2006), before the current financial world crisis, hourly labor productivity levels were slightly higher in France than in the United States, and noticeably lower in the United Kingdom (by roughly 10%) and even lower in Japan (30%), while TFP levels are very close in France, the United Kingdom and the United States, but much lower (40%) in Japan.Productivity, growth accounting, macro-economic history.

Capital Utilisation and Retirement

This empirical analysis aims at assessing the effect of the economic climate and the intensity of capital utilisation on companies’ capital retirement behaviour. It is conducted using individual company data, as well as original data on the degree of utilisation of production factors. The sample includes 6,998 observations over the period 1996-2008. This database is, to our knowledge, unique for the empirical analysis of the intensity of capital utilisation on firms’ capital retirement behaviour. We adjust for endogeneity biases by means of instrumental variables. The main results obtained from the estimation of capital retirement models may be summarised as follows: i) The retirement rate decreases with the variations in cyclical pressures measured by the changes in output and the workweek of capital; this relation corresponds to a countercyclical decelerator effect on capital retirement; ii) The capital retirement rate increases with the structural intensity of capital utilisation; this effect, which corresponds to a wear and tear one, is nevertheless small compared to the decelerator one; iii) The profit rate does not have a significant impact on the retirement rate. Compared with the existing literature, here mainly Mairesse and Dormont (1985), the contribution of these results is to show, through the use of unique survey data, that the effect of the intensity of capital utilisation on capital retirement is structurally positive, via a wear and tear effect, and cyclically negative, via a decelerator effect which completes that already taken into account via the effect of changes in value added.Capital, Capital measure, Capital retirement, Capital utilisation.

Investment in Information and Communication Technologies: an Empirical Analysis

Recent economic literature has identified sizeable differences across industrialised countries in the diffusion of Information and Communication Technologies (ICTs) throughout the production structure. This paper addresses the question of whether differences in the price elasticity of demand for ICTs could explain why Europe lags behind the United States in terms of ICT diffusion. We use annual macroeconomic data covering the period 1975-2001 and consider five countries: France, Germany, the Netherlands, the United Kingdom and the United States. Europe's lag in ICT diffusion does not appear to be linked to cross-country differences in the price elasticity of demand for ICT products. Our results suggest that at least part of the gap in ICT diffusion should be ascribed to more structural cross-country differences. The estimated value of the price-elasticity of computer hardware and software is generally lower than -1 which, given the decline in the relative price of these products, explains the increase in their share of investment expenditure and GDP. This situation is characteristic of a diffusion stage and is necessarily temporary.ICT ; Investment ; Factor demand

The Rocky Ride of Break-even-inflation rates.

The correlation matrix between break-even inflation rate movements and real interest rate movements across several countries shows puzzling features. Correlation is significantly positive for nearly all cross-border pairs whereas it is nil, positive or negative unsystematically within countries. By means of a correlation matrix decomposition, we provide an explanation for this puzzle.Inflation-linked bonds ; Break-even inflation rates

Perspectives on Productivity and Potential Output Growth: A Summary of the Joint Banque de France/Bank of Canada Workshop, 24-25 April 2006

A nation's productivity is the prime determinant of its real incomes and standard of living, as well as being a major determinant of its potential output. In the short run, deviations of actual output from potential output are a useful indicator of inflationary pressures. This article is a short summary of the proceedings of the workshop, which focus on productivity and potential output growth among industrialized countries. The research is organized under three main themes: estimating potential growth; productivity and growth; and institutions, policies, and growth.