For this and other reasons, the contribution from IT cannot be distinguished from other factors. 2. Implications for monetary policy  The implications that the new economy might be expected to have for monetary policy can be illustrated with the aid of a simplified notion of how the economy functions. In the long term, a country’s productive capacity is usually assumed to follow a comparatively stable trend. This trend rate of growth is determined by demographic factors, for example, together with, above all, the pace at which technical advances are made and incorporated in the production process. Thus, the fact that Sweden’s GDP per capita is now appreciably higher than in, say, the 1950s and even more so than a century ago is mainly explained both by our ability to develop new technologies and new modes of production and by the new technology that we have been able to import from elsewhere and introduce here. Monetary policy’s primary contribution is perceived today as being to ensure that the macroeconomic environment, mainly as regards inflation, is stable and predictable. A stable value of money and an efficient payment system are important preconditions for an efficient modern market economy. Monetary policy affects aggregate demand via interest rate adjustments. Policy is normally aimed at steering demand so that the economy remains as close as possible to its long-term growth trend, thereby avoiding unnecessary cyclical fluctuations. This also helps to keep the level of inflation stable. However, it is not only cyclical fluctuations around trend growth that influence inflation.
A closer look at the figures reveals that the improvement has been most marked in manufacturing and particularly rapid in industries where computers are used most intensively. The upward shift in US productivity growth was preceded by an investment boom that gave pride of place to investment in IT-related capital. Since the 1980s, American investment in computer capacity has doubled in nominal terms; in relation to the dramatic price fall for computer capacity, the level has risen by a factor of more than twelve. To what extent, then, has the improvement in productivity come from IT? What are the mechanisms? Computers have clearly helped to make production processes more efficient and automated, just as new techniques have led to the creation of many new goods and services, from compact discs to tele-medication. But in order to understand the broader implications for the workings of the economy, one should perhaps heed Alan Greenspan, head of the US Federal Reserve, and single out the word “information”. When information flows more efficiently, there will be a better matching of supply and demand both internally and between firms, as well as less tied-up capital for coping with contingencies. In that firms can use IT to enhance “just-in-time” routines, they can cut the levels of stocks and working capital. Better information also paves the way for smaller production units and less bureaucratic structures. All these processes are now being further reinforced by the rapidly growing flow of information on the Internet.