Innovations, Economic Growth and Productivity in the New Economy

The aim of this paper is to explain several distinguished stylized facts of the new economy, with a particular focus on the productivity debate. Recent evidence suggests that total factor productivity gains were low in the early phase of the new economy, but increased in more recent years. By contrast, we observe enormous increases in labour productivity due to capital deepening. The paper suggests a concise explanation for these empirical facts. We find that it is in the nature of the new economy, where productivity is created not within each firm but through the combination of heterogeneous products provided by a range of firms between firms, which makes it hard to capture productivity gains in the provision products of the New Economy in the data. The paper concludes by discussing several other features of the new economy, such as an inflation rate below its fundamentals, increased stock market volatility, and a threshold for the adoption of new technologies, explaining the regional divide between countries exhibiting a New Economy and others which do not.