who won the nobel prize in economics for his work on the theory of economic growth - once quipped that you can see computers everywhere except in the productivity statistics! that situation has recently begun to change, and we now have strong evidence that the productivity growth that our economy has experienced is in fact due in part to newer technologies. research by two economists on the board staff - steve oliner and dan sichel - sheds some light on the sources of this faster productivity growth. about one - half of the 1 percentage point increase in productivity growth over the 1995 - 1999 period can be attributed to so - called “ capital deepening ”. as everyone here is well aware, providing your workers with more equipment improves his or her efficiency. likewise, at the aggregate level, the high ( and rising ) levels of business investment raised the amount of capital per worker and thereby boosted productivity. it is also interesting to note that most of the capital deepening reflected greater spending by businesses on high - tech equipment : computers, software, and communications equipment. another 1 / 2 percentage point of the pickup in productivity growth reflected technological innovations in the actual production of computer hardware and semiconductors as well as better management - perhaps assisted by these high - tech investments of the nation ’ s capital and labor resources. oliner and sichel estimate that, if one consolidates all the influences of high - tech investments, they account for about two - thirds of the acceleration in productivity since 1995. this research supports the view that fundamental changes are under way in our economy. but technological waves ebb and flow, and it is natural to ask whether we can count on such rapid productivity growth in the future. on this score, i am cautiously optimistic. but, as an economist, i need to see hard evidence of actual ongoing productivity gains or cost reductions in the economic statistics to truly believe that the world is continuing to change in a fundamental way. i am confident that the efficiency gains that have already been achieved are permanent : the investments have been made, the technologies are in place and are being disseminated, and production is proceeding apace. but i think that it is wise to get support for the assertions that all of the new technologies and business practices now coming to the fore will prove to be as revolutionary as some of their marketing materials suggest. clearly, there is great potential to improve efficiency using internet - based e - commerce strategies such as electronic marketplaces and business - to - business supply chain management. but no one really knows

requires an increase in real market interest rates. market interest rates must rise in order to maintain equilibrium between the demand for investment funds, which increases, and the supply of investment funds. and, indeed, we have seen that market interest rates, particularly for corporate issuers, have risen steadily for the last year or so. this somewhat abstract description of the effects of a step - up in the growth rate of technical change bears a striking resemblance to the developments in labor markets, prices of goods and services, capital investments, and fixed - income markets of recent years. but there ’ s still an element missing. how does the performance of the stock market in recent years fit into this picture? a higher rate of technical change that raises the productivity and hence the profitability of capital should elevate the valuation of equities. but how much should stock values rise under those circumstances? are stocks today overvalued, correctly valued, or undervalued? i certainly do not know, and i am not aware of anyone who does. as a result, i believe that it would be unwise - and indeed impossible - for the federal reserve to target specific levels of valuations in equity markets. however, equity markets obviously do have spillover effects on the real economy and, thus, need to be considered in assessing the aggregate balance of supply and demand. given the efficiency and forward - looking nature of financial markets, even future technical innovations will have an immediate effect on equity valuations. equity valuations in turn can influence consumer behavior. as you know, economists often speak of the “ wealth effect ”, and econometric modeling indicates that consumers tend to raise the level of their spending between 2 and 5 cents for every incremental dollar of wealth over a period of two to three years. as a consequence, equity valuations can have a noticeable effect on consumption and on macroeconomic performance. additionally, equity markets are a source of investment capital, and valuations in the stock market are one determinant of the cost of capital for businesses. to put a rough number on these influences, simulations by the board staff using our econometric model of the economy suggest that wealth generated in the equity markets over the last four years added about 1 percentage point to the growth rate of real gdp. some particularly enthusiastic observers of the “ new ” economy argue that inflationary pressures are no longer a risk. i firmly believe that we should recognize that, even in a high - productivity economy, stresses