The New Economy and The Dollar Puzzle

Abstract

The revolutionary changes in information technology (IT), globalisation and financial innovation have overturned the Solow productivity paradox and spawned a New Economy (NE) in Australia in the late 1990s. Both growth accounting estimates and the use of the information superhighway rank Australia next to USA as a NE. Australia is an avid user but not a producer of IT that propels the NE. The debate on the need for a new paradigm for the new economy on the grounds that key mechanisms of the old paradigm have become obsolete is reviewed. The breakdown of the short-run Phillips curve tradeoff and the redundancy of the long-run speed limits to growth are examined and dismissed as poppycock on both theoretical and empirical grounds. The IT technology, because it is subject to severe, diminishing returns and problems of information overload, fails to rank with the great inventions of the past and will not be a harbinger of the Third Industrial Revolution. Nonetheless, on the basis of the “delay hypothesis” the dismissal of the case for a new paradigm for the NE may be premature at this stage. The paper also examines the puzzling nosedive of the dollar during the first half of the year 2001. This occurred despite the strong macroeconomic fundamentals and the emergent NE. The paper concludes by commenting on the policy reaction function for a small open NE committed to inflation targeting.