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Does the "New" Economy Call for a "New" Monetary Policy?
By Charles I. Plosser
Introduction
My simple one-word answer to the question posed by the title of this paper is no. Like most simple answers the devil is in the details. The details are, of course, buried in what one means by the "new" economy and by "new" monetary policy. Calling something new or different is more newsworthy than talking about underlying principles that are largely invariant. Yet sorting out what is new and what is not—and understanding the relevance for the question at hand—is necessary to arrive at a sensible answer. The issues facing monetary policy are not new and are largely independent of the innovations embodied in the "new" economy.
It is important to consider what the "new" economy means and what it does not mean because the term can mean different things to different people. One extreme view is that the economy has fundamentally changed in ways that are so profound that a new paradigm is required to understand and analyze how it performs and how policy impacts that performance. Indeed, some observers have even argued that we must throw out the "old, outdated" concepts of supply and demand because they are no longer relevant in the "new" information age. A less radical view, and the one to which I subscribe, is that the economy is indeed changing in response to technological innovations. These innovations change relative prices that alter resource allocations in important, but predictable ways. These changes are altering the economic landscape—creating new businesses and industries and transforming or destroying old ones. This is the same dynamic process that has been going on throughout the Industrial Revolution. The underlying principles of supply and demand and the fundamentals of market economics have not changed. In fact, it is the power and effectiveness of markets in responding to new technology and providing the right relative price signals that induce the appropriate reallocation of resources to take advantage of the innovations. Competitive markets are dynamic and their extraordinary ability to create wealth is a testament to theirdynamism. Joseph Schumpeter's description of economic growth as a process of "creative destruction" is as appropriate today as it was when he wrote it nearly 60 years ago. The technological advances we are witnessing do not signal the death of the concept of supply and demand, but are evidence of its vitality and strength.
While technological innovations are not changing the fundamentals of market mechanisms, they are certainly changing the products and services available to market participants in dramatic ways and the underlying level of productivity in the economy. This is clearly the case in the financial industry and is a source of concern by some analysts overits implications forthe conduct of monetary policy. It is legitimate, therefore, to ask if these technological advances change the fundamentals or practice of monetary policy.
In order to discuss these issues, it is important to consider the objectives of monetary policy and the state of monetary theory. I argue that technological innovations may have important implications forthe banking system, but that the goals and objectives forsound monetary policy, as well as the means for achieving them, remain largely unchanged. I show why this is the case using two examples of changes in the economy that are sometimes used to illustrate the evolution of the "new" economy. In doing so, I examine the impact of technology on the means of payment and the consequences forfinancial institutions and, perhaps, monetary policy. I also address the question of the implications formonetar y policy of the changes in the rate of growth of productivity.
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