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Technological Progress and Monetary Policy: Managing the Fourth Industrial Revolution

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  • Stephen S. Poloz

Abstract

This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the “fourth industrial revolution.” The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: * new technology displaces workers; * investor hype linked to the new technology leads to financial excesses; * new types of jobs are created; * productivity and potential output rise; * prices and inflation fall; and * real debt burdens increase, which can provoke crises when asset prices crash. The experience of the Federal Reserve during 1995–2006 is particularly instructive. The paper uses the Bank of Canada’s main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations.

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  • Stephen S. Poloz, 2019. "Technological Progress and Monetary Policy: Managing the Fourth Industrial Revolution," Discussion Papers 2019-11, Bank of Canada.
    • Handle: RePEc:bca:bocadp:19-11
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    References listed on IDEAS

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    1. Tobias Adrian & Fernando M. Duarte, 2016. "Financial vulnerability and monetary policy," Staff Reports 804, Federal Reserve Bank of New York.
    2. Edge, Rochelle M. & Laubach, Thomas & Williams, John C., 2007. "Learning and shifts in long-run productivity growth," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2421-2438, November.
    3. Julien Champagne & Guillaume Poulin-Bellisle & Rodrigo Sekkel, 2018. "Evaluating the Bank of Canada Staff Economic Projections Using a New Database of Real-Time Data and Forecasts," Staff Working Papers 18-52, Bank of Canada.
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    5. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
    6. Michelle Alexopoulos, 2011. "Read All about It!! What Happens Following a Technology Shock?," American Economic Review, American Economic Association, vol. 101(4), pages 1144-1179, June.
    7. Stephen S. Poloz, 2014. "Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective," Discussion Papers 14-6, Bank of Canada.
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    More about this item

    Keywords

    Economic models; Financial stability; Monetary policy framework; Uncertainty and monetary policy;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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