[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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e-TIME AND MACROECONOMIC POLICY
As the U.S. economy boomed during the late 1990s, economists
speculated on how the business cycle would be affected.
There has been less discussion of the impact the new
information-based economy will have on macroeconomic policy.
Policymakers will be affected if the economy now responds
more rapidly to changing conditions.
Fluctuations in inventory investment, which have been a
major factor in several previous business cycles, may in the
future be limited by the new information technologies that
enable firms to manage inventories better. In earlier business
cycles, a slowdown in sales caused inventories to build up, as
decisions about production could not be based on real-time
sales information. The rising level of unsold inventories then
triggered large cuts in production. Today, with access to almost
instantaneous information on sales, production, and inventories,
managers can fine-tune their production levels, avoiding
the types of fluctuations seen in the past. By providing managers
with information more rapidly, new technologies speed
their responses to changing economic conditions.
Though businesses may benefit from being able to respond
more quickly to changing economic conditions, policymakers
may have less time to react and may therefore find themselves
unable to anticipate economic developments in time to adjust
policy. Because there is a lag between changes in policy and
their effect on the economy, policymakers need to be forwardlooking.
In the case of monetary policy, the Federal Reserve
would like to raise interest rates before inflation increases and
lower rates before economic growth slows. If economic adjustments
occur more quickly now, policymakers may be harder
pressed to react in time. Thus, at the end of 2000, the sudden
slowing of the U.S. economy caught policymakers by surprise.
The Federal Reserve reacted with a half-point interest rate
cut on January 3, 2001, after the slowdown began.
In the past, interest rate cuts by the Fed have taken twelve
to eighteen months to have their peak impact on the economy.
While the new economy may give the Fed less time to react, it
remains to be seen whether it also shortens the lag between
changes in policy and their impact on the economy.
Instantaneous computer tracking enables managers to avoid both inventory shortages
and unnecessary inventory buildups.
858 ∂ CHAPTER 38 CONTROVERSIES IN MACROECONOMIC POLICY