place ; hence, the crucial role for flexible labor, product, and financial markets. as i will describe in more detail, this interaction effect of it with a flexible economy can help to explain why the it revolution has produced higher productivity growth in the united states but not in many other industrialized economies. while it is important for policymakers to understand the sources of the productivity resurgence, it is also important for us to understand the macroeconomic implications. an often overlooked implication is that, all else equal, an increase in the growth rate of productivity will tend to put upward pressure on real interest rates. but in fact we have not seen the predicted rise in real rates. of course, we do not live in the world of simple economic models so all other things are not equal. in particular, i believe one reason is that sound economic policies have created a more stable economic environment, and with that has come low and stable inflation and an ongoing desire by foreigners to invest in the united states to reap higher returns associated with higher productivity growth than may be available in their economies. at bottom, i expect that the flexibility of u. s. markets will continue to provide a nourishing environment for technological and process advances, and that very flexibility, along with sound monetary policy, will also allow the u. s. economy to enjoy the benefits of the evolving macroeconomic dynamics that accelerating productivity sets in motion. a framework for analyzing the growth of labor productivity a great success story for the american economy has been the resurgence of productivity growth that began around 1995. 1 from 1973 to 1995, labor productivity in the nonfarm business sector increased at an annual rate of 1 - 1 / 2 percent. ( labor productivity is defined in terms of output per hour of work in the economy. ) in contrast, from 1995 to 2000, productivity accelerated to a 2 - 1 / 2 percent rate. perhaps even more remarkably, despite a recession, the fall of the dot - com market, a broad stock market correction, terrorism, and corporate governance scandals, productivity has accelerated even further since 2000. despite some slowing in the past few quarters, productivity in the nonfarm business sector has risen at an average annual rate of about 3 percent over the past 5 - 1 / 2 years. many economists, including myself, use growth accounting as a framework for analyzing productivity developments. in its simplest terms, growth accounting decomposes the growth rate of labor productivity into two major components. one is the contribution to productivity growth that comes from

have tremendous cumulative effects over time on production and income. let me close by quoting the nobel laureate robert lucas who once said that when one contemplates the effect that sustained economic growth has on human welfare, it is hard to think about anything else. references baily, martin ( 2003 ). " the u. s. economic outlook : investment, productivity, deflation, " ( 72 kb pdf ) slide presentation. washington : institute for international economics, april. bernanke, ben s. ( 2005 ). " the global saving glut and the u. s. current account deficit, " speech delivered at the homer jones lecture, april 14. bloom, nick, raffaella sadun, and john van reenen ( 2006 ). " it ain ’ t what you do, it ’ s the way you do i. t. : investigating the productivity miracle using the overseas activities of u. s. multinationals, " working paper. london : centre for economic performance, london school of economics, may. brayton, flint, and peter tinsley ( eds. ) ( 1996 ). " a guide to frb / us : a macroeconomic model of the united states, " finance and economic discussion series 1996 - 42. washington : board of governors of the federal reserve system, october. brynjolfsson, erik, and lorin m. hitt ( 2000 ). " beyond computation : information technology, organizational transformation and business performance, " journal of economic perspectives, vol. 14 ( fall ), pp. 23 – 48. corrado, carol, and lawrence slifman ( 1999 ). " decomposition of productivity and unit costs, " american economic review, vol. 89 ( may ), pp. 328 – 32. for example, baily ( 2003 ) ; gordon ( 2003 ) ; and jorgenson, ho, and stiroh ( 2004 ). corrado, carol, paul lengermann, and larry slifman ( 2005 ). " the contribution of mncs to u. s. productivity growth, 1977 – 2000, " unpublished paper, board of governors of the federal reserve system, division of research and statistics, july. corrado, carol, paul lengermann, eric bartelsman, and j. joseph beaulieu ( 2006 ). " modeling aggregate productivity at a disaggregate level : new results for u. s. sectors and industries, " ( 510 kb pdf ) paper presented