Staff Discussion Paper/Document d’analyse du personnel 2019-11 Technological Progress and Monetary Policy: Managing the Fourth Industrial Revolution by Stephen S. Poloz Bank of Canada staff discussion papers are completed staff research studies on a wide variety of subjects relevant to central bank policy, produced independently from the Bank’s Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank. www.bank-banque-canada.ca Bank of Canada Staff Discussion Paper 2019-11 November 2019 Technological Progress and Monetary Policy: Managing the Fourth Industrial Revolution by Stephen S. Poloz Governor Bank of Canada Ottawa, Ontario, Canada K1A 0G9
[email protected] ISSN 1914-0568 2 © 2019 Bank of Canada Acknowledgements This paper was prepared for presentation at the Asia Economic Policy Conference at the Federal Reserve Bank of San Francisco, November 14, 2019. Special thanks to Thomas Carter and Jacob Dolinar for their advice and for the background historical research and model simulations. I would also like to thank, without implicating, Paul Beaudry, Paul Chilcott, Don Coletti, Toni Gravelle, Tim Lane, Jim MacGee, Eric Santor, Larry Schembri and Carolyn Wilkins for comments on an earlier draft. iii 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.