The first half of this paper shows the mechanisms through which innovations in Information Technology (IT) have impacts on our economy. Switching costs from existing technologies and network externalities may play important roles in the propagation of IT on a microeconomic level. In addition to the aggregation effects of such externalities, the costs of reallocating capital and retraining labor will hamper macroeconomic performance. Mismeasurements in economic statistics may prevent us from making optimal decisions based on relative price changes. The second half of this paper discusses the issues for improving efficiency in conducting monetary policy by focusing on the price mechanism. We should be careful whether to accommodate the "supply shocks" or not, considering the possibility of nominal rigidities or fluctuation in the general price level. It is also shown that mismeasurements in the price index may damage the credibility of a central bank, since it will be quite difficult to observe the achievement of monetary policy commitment.
Keywords: Information Technology; IT paradox; Mismeasurement in economic statistics; Network externalities; Adjustment cost; Relative price; Policy commitment
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.
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