Paper #1794

Title:

Monetary policy in the age of automation

Authors:

Luca Fornaro and Martin Wolf

Date:

July 2021 (Revised: September 2022)

Abstract:

We provide a framework in which monetary policy affects firms' automation decisions (i.e. how intensively capital and labor are used in production). This new feature has far-reaching consequences for monetary policy. Monetary tightenings may depress firms' use of automation technologies and labor productivity, even permanently, while having a transitory impact on inflation and employment. A protracted period of weak demand might translate into less investment and de-automation, rather than into deflation and involuntary unemployment. Technological advances that increase the scope for automation may give rise to persistent unemployment, unless they are accompanied by expansionary macroeconomic policies.

Keywords:

monetary policy, automation, fiscal expansions, hysteresis, liquidity traps, secular stagnation, endogenous productivity, wages

JEL codes:

E32, E43, E52, O31, O42

Area of Research:

Macroeconomics and International Economics

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