Christopher Gortz, University of Birmingham
News of a big pay rise might have you booking the nearest fancy restaurant for a slap-up meal to celebrate, or encouraging you to go shopping before your raise even hits your bank account.
Recent research shows that this is also essentially what happens on a broader economic scale when news about future technologies breaks out. Expectations about technological advancements are associated with higher future wealth. When we see new technologies such as 5G cellular networks or delivery drones on the horizon, we can see that they could dramatically change our daily lives, just as the internet and smartphones have done in the past.
And, as in the example above of a future pay rise, it encourages people to spend now, boosting GDP even before the new technology is actually available. This research can also help us understand how the headlines about interest rates affect the future of the economy.
Almost daily, we read and learn about impending advances in technology that give us hope for higher future wealth and a better quality of life – whether it’s a new type of phone, better tools online conferencing or even the development of life-changing technologies. such as mRNA vaccines or autonomous electric vehicles. But we don’t have to wait for these new technologies to become available for them to start affecting our lives. Our behavior even changes just in anticipation of future technological advancements – because they make us anticipate a richer future, research shows that we spend more in the present.
Economists have studied these types of behavioral changes in response to news for over 100 years, offering various theories about the impact on key economic measures such as GDP. However, the tools and data needed to measure these economic impacts are increasingly available and accurate.
My research with Christopher Gunn of Carleton University and Thomas Lubik of the Federal Reserve Bank of Richmond uses new statistical techniques, methods, and data sources to show that news about future technological advancements consistently trigger a strong boom in the economy. . Looking at nearly 40 years of data from the United States, we found that future technology news can account for up to 50% on average of fluctuations in GDP at the time.
All because expectations of technological advancements are associated with greater wealth in the future. Hearing about new technology makes us feel richer in the present and – as in the example above of a future pay rise – leads to higher spending, even before the technology is available. This is consistent with existing findings that anticipated shocks or shifts in the economy—those expected due to past news or announcements—are more likely to cause fluctuations in the business cycle than unanticipated shocks to productivity. .
Certainly, we still need to develop a better understanding of the many dimensions that lead to adjustments in expectations in light of the news, as well as the effect on the economy. It’s too early to pin down all of the economic forces at play during the COVID-19 recession, for example, but the research discussed above suggests that positive tech news may have mitigated a severe COVID-19 recession and fueled partly an initial economic recovery. after the pandemic. The technological developments we were hearing about at the time ranged from the development of mRNA vaccines to efficiencies achieved through video conferencing and online collaboration software.
Anticipating rate hikes
The finding that our expectations about future technologies are a major factor driving booms and busts could also be applied to other types of new information. After all, it’s not just news about future technologies that affect business cycles, these days commodity prices, central bank rate decisions and inflationary developments are among the many news items that shape our expectations for the future. Thinking about these issues affects our day-to-day economic decisions, which has a big effect on the overall economy.
When central banks announce their intention to raise interest rates – as the European Central Bank recently announced it would do in July and the Bank of England has already announced it – the big banks start to prepare to raise interest rates on mortgages and loans, as well as on savings. So, upon hearing the news of a likely future rate hike, mortgage homeowners often immediately begin to consider switching to a lower fixed rate with a longer term. They may also begin to shift their money from the stock market to savings products more directly linked to rising interest rates.
Central banks predict that higher rates will cause a reduction in demand for goods and services as people save more and pay more for their mortgages and loans. They know this could reduce future inflation – a key objective in today’s economic environment. In this way, news about future changes in interest rates not only affects the current economy, but also triggers changes in people’s expectations, affecting the future economy as well.
Christoph Gortz, associate professor in macroeconomics, University of Birmingham
This article is republished from The Conversation under a Creative Commons license. Read the original article.