eva srejber : new economy - or blend of new and old? speech by eva srejber, second deputy governor of the sveriges riksbank, at a meeting arranged by wm - data ub tylosand on 23 october 2000. * * * major technological changes have occurred before. then as now, many people talked about a new age that would involve better communications, new economic relations and a very promising future. it is therefore important to keep a level head amidst the technological enthusiasm over future opportunities. the fact that i am today emphasising the risks more than the advantages, is not because i consider the risks to be more important than the advantages, but because the risks appear to have been largely forgotten in the general debate on the economy. let us make a sober analysis of what is happening, and maybe we can avoid repeating the mistakes made during previous technological leaps. moreover, i will touch on the uncertainty and lack of information regarding the structural changes currently taking place in the economy. in conclusion, i will also indicate to what extent these phenomena have already affected and can be expected to affect monetary policy. it has happened before a nation ’ s economy is constantly subject to changes that lead to reappraisals or to the development of old economic relations and theories. this is nothing new. examples of this include the introduction of the steam engine and the telegraph at the beginning of the 19th century, the building of the railways somewhat later and the internal - combustion engine and electric motor in the 20th century. these changes usually follow a similar pattern of growth and structural transformation. the transitional phase initially involves a period of crisis, which is expressed in company closures and rising unemployment. after this, productivity and growth increase. some industries expand rapidly and are met by expectations of large profits. the demand for labour is unevenly distributed and matching problems arise. wage differentials increase. in many ways the “ new ” economy can be regarded as one in a row of structural changes taking place in society. it is thus more appropriate, in many respects, to talk of a blend of new and old, rather than a new economy. in comparison with the steam engine, the railways and electricity, today ’ s it developments may be perceived as marginal. but, while there is considerable exaggeration in the discussion of the importance of it, i would still say that today ’ s change process could be compared to these events. computers and the internet allow us to gather information easily, cheaply

##1980s, for example, no developed interbank market, as we know it today, existed. in this environment, the banque de france determined the level of interest rates using bilateral relationships with a few major banks in the country, which were the only counterparties to its open market operations. given the two - tiered structure of the french banking system, it was indeed able to steer the general level of interest rates, even though this took place in a less developed system without markets for sophisticated financial products. in japan, in the first half of this decade, the situation was somewhat different, as money markets were shallow not only because of the high credit risk in unsecured transactions, but also because of the extremely low level of nominal interest rates. unable to lower interest rates further, the bank of japan tried to encourage the provision of credit by its policy of quantitative easing. with interest rates very close to zero, interbank trading dried up almost completely. the case of japan illustrates well the importance of a well - functioning interbank market also for other financial products. without a price for short - term liquidity, the market for term lending stopped functioning. furthermore, the basis for other financial markets, such as repo, bond and certain derivatives markets, disappeared, and these markets became less liquid as well. many loan contracts have clauses that allow the interest rate to be de - indexed from the euribor in the event of “ market disruption ”. however, such clauses have not been widely invoked as yet and the legal and economic implications of so doing remain uncertain. the only exception to this apparent change in the long - term relationship seems to be the case of short - term rates on consumer credit, which have been typically found to be rather sluggish. also the corporate bond yield displays a more volatile pattern than bank lending rates. whether short - term retail interest rates in the euro area over the past year have followed more closely the eonia rate or euribor rates can be analysed using the standard vector error - correction model of the bank interest rate pass - through where short - term retail bank lending and deposit rates are regressed against either the eonia rate or a term money market rate. in the present environment, the intermediation role taken by the central bank replaces to some extent money market activity. there are limits, however, to the extent that a central bank can perform this function. first, not all participants in the money market are banks and thus eligible