Mr Heikensten examines different aspects of the new economy and its implications for monetary policy  Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, to The Riksdag’s Standing Committee on Finance, Stockholm, on 24 February 2000. *  *  *  The new economy, our topic today, is a concept that people are using frequently without always taking the trouble to explain what they mean by it. As interpretations differ somewhat, the discussion is liable to be a little confused. According to the definition most people seem to have in mind, the new economy is a result of a favourable shift in trend productivity that has raised the potential growth rate. This shift is attributed in turn to the development and spread of information technology (IT). Another common explanation for the higher productivity growth is the stronger competition that has resulted from deregulations and an increasingly integrated global economy. Moreover, in that much of the discussion of the new economy originated in the United States in the light of the good economic performance there in the 1990s, emphasis has been placed on the importance of a good macroeconomic environment. My starting point today is the US economy. My primary aim is not to present a comprehensive picture of developments there but rather to highlight the issues that these developments have raised and initiated the debate on the new economy. While my discussion will centre on the advances in IT, for the US economy there have been other beneficial factors.
One important reason is considered to be that various types of structural adjustments, in business as well as in society in general, were needed before the benefits of electricity could be reaped efficiently. At factory level, for example, more flexible production processes enhanced productivity when, instead of running much of the workshop in a cumbersome manner from a single large electric motor, smaller power units were developed for single machines. Thus, since it takes time to work out and implement various types of organisational changes that are most appropriate for the new techniques, there is liable to be a considerable time lag before general purpose innovations have an impact. This time lag unfortunately also makes it difficult to single out the factors that underlie technical advances and growth. What has happened in the United States in recent years also illustrates another consequence of the new economy. Besides the strong trends for productivity, capital formation and employment, which have BIS Review 18/2000  2  resulted in a more positive appraisal of potential growth, share prices have risen dramatically and saving has fallen to low levels. A major question at present is how stable this situation will be. Summing up, then, there are a good many signs that IT may have contributed to a more favourable productivity trend in the United States, particularly in recent years. But there have also been many other changes, such as increased competition and the emergence of deep and efficient markets for venture capital.