This study examines how automation can have an impact on the effectiveness of monetary policy and inflation dynamics. We incorporate a task-based production technology into a standard New Keynesian model with two kinds of nominal rigidities (price/wage rigidity). When monetary easing raises wages, automation opportunities allow firms to substitute costly human labor with cheaper machines. This yields the automation effect of monetary policy, which increases labor productivity and magnifies the rise in real output. In turn, automation lowers real marginal costs for firms, thereby restraining the rise of inflation and flattening the Phillips curve. When prices are rigid and wages are flexible, the automation effect of monetary policy is particularly large, and the flattening of the Phillips curve is most pronounced. The automation effect also depends on the automation frontier, i.e., the remaining opportunities for automation, and a kinked Phillips curve emerges when firms face technological constraints on automation.
Keywords: Automation; Monetary policy; Nominal rigidities; Phillips curve
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.