A New Keynesian Model with Robots: Implications for Business Cycles and Monetary Policy

Abstract

This paper examines the effects of labor-replacing capital, referred to as robots, on business cycle dynamics using a New Keynesian model with a role for both traditional and robot capital. This study finds that shocks to the price of robots have effects on wages, output, and employment that are distinct from shocks to the price of traditional capital. Further, the inclusion of robots alters the response of employment and labor’s share to total factor productivity and monetary policy shocks. The presence of robots also weakens the correlation between human labor and output and the correlation between human labor and labor’s share. The paper finds that monetary policymakers would need to place a greater emphasis on output stabilization if their objective is to minimize a weighted average of output and inflation volatility. Moreover, if policymakers have an employment stabilization objective apart from their output stabilization objective, they would have to further focus on output stabilization due to the deterioration of the output-employment correlation.

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Notes

  1. 1.

    The authors acknowledge this model is not directly comparable to those in Smets and Wouters (2005) and Justiniano et al. (2010). Estimation of this model might produce different parameter values. This paper leaves estimation of the model as the subject of future research.

  2. 2.

    This implies that the difference between capital and robots in this specification is the difference in their depreciation rates.

  3. 3.

    In other words, when traditional capital and composite labor are complements and when robots and human labor are substitutes.

  4. 4.

    While this paper includes the correlations in the data, the purpose of this paper is not to match empirical moments, but to explore the effects of robots in a business cycle model.

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Correspondence to Tsu-ting Tim Lin.

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The authors thank the participants of the 2014 Liberal Arts Macroeconomic Workshop, especially Bill Craighead, the discussant of the paper; the 2014 Canadian Economic Association Annual Conference; and seminar participants at the National Taipei University in 2015 for their invaluable comments and suggestions.

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Lin, T.T., Weise, C.L. A New Keynesian Model with Robots: Implications for Business Cycles and Monetary Policy. Atl Econ J 47, 81–101 (2019). https://doi.org/10.1007/s11293-019-09613-w

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Keywords

  • Robotization
  • Labor’s share of income
  • Monetary policy
  • Business cycle fluctuations

JEL

  • E22
  • E24
  • E25
  • E32
  • E52