How Fast Can the New Economy Grow? A Bayesian Analysis of the Evolution of Trend Growth

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Abstract
This paper uses consumption data to estimate the trend growth rate for the “new economy.'' The analysis starts with the assumption that a trend break in GDP should be accompanied by a trend break in consumption. But because consumption is forward looking and smoother than GDP, it should be easier to detect a trend break in the former. The forward looking nature of consumption allows us to incorporate the private expectations of U.S. households about the new economy. The relative smoothness makes it easier to separate changes in trend growth from ordinary cyclical movements. The evidence confirms that there has been an increase in trend growth over the last 5 years, but the increase seems rather modest. The new economy is likely to grow more rapidly than in the 1970s, but not as fast as in the 1950s or early 1960s.
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