How fast can the new economy grow? A Bayesian analysis of the evolution of trend growth

This paper develops a Bayesian filtering strategy for estimating trend growth in the new economy. The filtering strategy involves three elements. Consumption data are used to help disentangle changes in the trend from ordinary cyclical movements. Drifting parameters are introduced to let the economy's law of motion evolve, and Bayesian methods are used to estimate the drifting parameters. The evidence points to a modest net increase in trend growth over the last decade. In per capita terms, the economy may grow more rapidly than in the 1970s, but probably not as fast as in the 1950s or 1960s. (c) 2005 Elsevier Inc. All rights reserved.