 Good morning everyone. Welcome to the second day of the ECB research annual research conference. We have two papers in this session, very interesting, both of them. The first one is by Luca Fornaro, Pompeo Fabra and Centre for Research in International Economics and proposes what I think is a very interesting and novel channel of non-neutrality for monetary policy. This is what I took away from your paper. Very interesting, very relevant for the current times of monetary restrictions, so I will invite Luca to the podium. For his exposition he has, as you know, 30 minutes followed by 15 minutes for Morten Raven, UCL. Good morning Morten. The discussion and then we'll open the floor for questions and answers, including in the live webcast. I have a slide, so I invite those who are connected from afar to place questions and I'll try my best to dispatch the questions afterwards. Luca, over to you. Thanks a lot to the organizers for inviting me to present this paper. It's a huge pleasure to be here. This joint work with Martin Wolf. Right, so technological progress often takes the form of automation. That is, we are constantly discovering new ways to replace a label with capital or machine in performing some production tasks. Just to show you a little bit of data here, I'm plotting the evolution of robot density, the number of robots per worker in the U.S. Just to show which is one measure of automation, just to show you that there's been a steady rise of the use of robots over the last 30 years. Right, in this paper we want to think about the implication of this process for monetary policies. So we want to think about questions such as, is automation deflationary? Does automation generate technological unemployment, as Keynes argued in 1930? How does monetary policy affect the use of automation? Can monetary tightening by increasing the cost of capital lead to less automation and less label productivity? So we think that these are very interesting questions. These are actually questions that are present in the policy debate. But perhaps surprisingly, there is not so much academic literature on this topic. And we think that one of the reasons is that we really don't have many frameworks connecting monetary policy of automation. So the main objective of this paper is really to provide one. And what we do in the end is quite simple. So we start from a standard model of automation. One proposed in a seminar paper by Archimoglu and Restrepo. And the key aspect of their model is just that they look at an economy in which capital and labor are very substitutable in performing some production tasks. So firms have some flexibility about whether to perform some tasks using machines or human workers. And this is interesting because this means that we can think about how macroeconomic condition, such as aggregate demand or the cost of capital or wages, affect firms' use of automation technologies. How intensively firms use capital and labor in production. And we add two simple features to this framework to think about monetary policy. So first of all, we add nominal wage rigidity so that monetary policy can have real effects and employment might deviate from its natural level. And second, we think about a case in which households have a discounted oiler equation. So essentially there is a long-run IS curve, a steady-state relationship between aggregate demand and the interest rate. And we do so because some research has shown that this addition fixes some anomalies of the new Keynesian model and because it allows us to think about long-lasting liquidity traps, which is something that we definitely want to do. Just to give you a preview of the result, I will show you two sets of results. First, I will show you how monetary policy affects firms' use of automation. The automation effect of monetary policy. So in the traditional view, the one captured by the New Keynesian model, monetary policy mainly affects the labor market, so employment and inflation. This is going to be the case in our model too, but I will show you the dinner framework. Under certain circumstances, monetary policy may also affect firms' use of automation and labor productivity. And what is going to be interesting also is that this effect is going to operate at a different horizon than the traditional one. So we see that in our economy, monetary policy has some transitory effect on employment and inflation, while it tends to have a more persistent effect on firms' technological choices and labor productivity. And then I will show you that in our model, a trade-off between unemployment and automation may arise for the central bank. Under certain circumstances, the central bank may need to choose whether to support employment or to support firms' use of automation technologies and labor productivity. And this is going to be the case during periods of persistently weak demand, so during long-lasting liquidity traps, or during periods in which there is rapid technological progress skewed toward automation technologies. All right, so since I don't have much time, I will show you just a sketch of the model. So I will show you how the model behaves in steady state, because that's a simple way to give you the gist of the framework, but bear in mind that in the background there is a fully micro-founded dynamic model that you can find in the paper. So the household side of the economy is very simple. So first, households need to decide how much to consume. And here consumption is just a decreasing function of the real interest rate for the usual reason, right? If the interest rate is higher, households want to say more and they will consume less. Second, households need to decide how to allocate their savings between bonds and capital. At the margin, they need to be indifferent, meaning that the real interest rate is to be equal to firms' cost of capital. And this is going to play a role later on, because monetary policy, by affecting the real interest rate, will also affect the cost of capital and so the incentives that firms have to use capital in production. And finally, households just supply some exogenous amount of labour and bar, which is just fixed for simplicity. So if wages were flexible, employment would always be equal to... House of labour supply would always be equal to a bar, so it will always be at full employment, but as I will show you later on, in this economy there will be some wage rigidity, meaning that we can think of cases in which actual employment is lower than house of labour supply, so there is involuntary employment, or the opposite case in which employment is bigger than a bar, so there is essentially overheating on the labour market. The production side is where things get a little bit more interesting. Here we are really following HMOL and RESTREPO, so there is a final good, which is produced using a continuum of intermediate inputs or production task. Some of these tasks, those with index lower than JL, can be produced using capital only. So these are the production tasks for which capital is really essential. Think about the building, for instance. Then there are some production tasks, those with index between JL and JH, for which labour and capital are highly substitutable, so they are actually perfect substitutes. So here we are thinking about those production tasks for which firms have a choice, whether to automate them, perform them using machine, or perform them using human. Think about, for instance, cashier in a supermarket, right? A supermarket can employ automatic cashiers, or it can employ people to work as cashiers, and it will choose, you know, which is the best option. And finally, there is a set of tasks, those with index higher than JH, for which simply an automation technology is not being invented yet. So this task has to be performed with labour. So you can think about this parameter, JH, really some technological constraint on how much firms can automate the production process, so we will take these as given throughout the paper. Okay, one nice thing about this framework is that once you aggregate the production function, it looks very familiar. It looks like just a copedaglas in capital and labour with a twist. What is the twist? Well, the intensity with which capital enters the production function, so JSTAR, it depends on its endogenous and it depends on firms decision. So the more firms want to automate the production process, the higher JSTAR will be. How do firms take their decision? Very simply, they compare the cost of capital to the wage adjusted for productivity and they pick the cheapest option. So for instance, if the cost of capital is high compared to the wage, firms will try to use labour as much as possible in production, so we will be in a low automation economy in which JSTAR is equal to JH. If the cost of capital is equal to the wage, firms will be indifferent to the margin, in an intermediate automation economy in which JSTAR can be anywhere between JL and JH. Finally, if capital is cheap compared to labour, firms will try to exploit as much as possible automation possibilities, so we will be in a high automation economy in which JSTAR is equal to JH. So this model captures, in a simple way, the intuitive notion that cheaper capital compared to labour induces firms to use automation technologies more intensively in production. It also captures the idea which I find relevant and interesting that this effect might be non-linear. They might operate sometimes, but sometimes they might not operate. For instance, when you reach the automation frontier, when JSTAR is equal to JH, further drops in the cost of capital will not affect the firm's use of automation anymore. Nominal rigidity is here. We do things in a very simple way. We just assume that there is a wage Phillips curve, so that nominal wage inflation is positively related to the deviation of employment from its natural level. Price is inherited part of the wage stickiness. This means that, as usual, by controlling the nominal interest rate, the central bank can effectively control the real interest rate in this economy. From now on, just to make things simple, I will frame monetary policy directly in terms of a path for this real interest rate. Then as usual, changes in the real interest rate affects aggregate demand, so the sum of consumption and investment. For instance, when the central bank lowers the interest rate, households want to consume more, firms want to invest more, there is more aggregate demand and higher output. Let me describe how monetary policy relates to firms' use of automation. Recall that here the interest rate is related to the cost of capital, because of the no arbitrage condition between the two assets. Recall that here firms, whenever they need to decide whether to use an automation technology or not, they look at the relative price of capital compared to wages. It turns out that once you solve the model, things get very simple and stuck. There is just a treasured value for the interest rate, let me call R-bar, such that if the interest rate is higher than R-bar, then capital is expensive and firms use the low automation technology. If the interest rate is lower than R-bar, then capital is cheap and firms use the high automation technology. This means that if the interest rate drops from above to below R-bar, then firms will react to that by changing their production technology, by increasing the intensity with which they use automation in production. When this happens you will have a booming investment because in order to exploit this high automation technology, firms need to accumulate capital, they need to produce machines, but also an increase in labour productivity because a higher use of automation technology in this economy increases the productivity of workers. This automation effect of productivity is really a distinguishing feature of our framework compared to the standard New Keynesian model and it's going to play an important role for what comes next. Let me just show you how this works graphically. Here I have the interest rate on the vertical axis and labour productivity on the horizontal one. What's interesting from this graph is that you can see that around R-bar there is a jump in productivity. When the interest rate drops from above to below R-bar, firms change their use of automation technology and this gives a boost to labour productivity. Things in this framework are very stark and unrealistic. Of course, there is no such treasured in reality, but even if you adopt the more realistic view and more realistic and smoother relationship between the interest rate and firms' use of automation technology as we do in the appendix, the main message will remain. The main message is that over a certain range of the interest rate changes in the interest rate are going to affect firms' use of automation and labour productivity is going to react particularly strongly compared to what we normally think. Let me connect this to the labour market. How is employment affected by changes in the interest rate? Equilibrium employment is given by firms' labour demand, which is the product of how much firms need to produce, which is determined by aggregate demand, times the inverse of labour productivity. You can see here that there are really two effects going on. For instance, suppose that there is a drop in the interest rate, perhaps induced by monetary policy. On the one hand, this is going to increase aggregate demand. In order to satisfy this higher aggregate demand, firms are going to need to employ more workers. Through this aggregate demand channel, a lower interest rate increases employment. This is the usual channel that we have in mind when we think about the impact of monetary policy on the labour market. But here there might be a second effect, sometimes operating the automation effect, which is just that if the interest rate, if a drop in the interest rate triggered an increase in JSTAR and increase in the use of automation by firms, this is going to trigger a large increase in labour productivity, which is going to reduce firms' labour demand because a higher labour productivity means that in order to satisfy a given level of demand, firms need to employ less workers. Which effect dominates? Well, it depends. So here I'm showing graphically how firms' labour demand relates to the interest rate. For instance, let's start thinking about what happens above RSTAR. So here firms are using the low automation technology. If the interest rate drop a little bit, labour demand is going to increase. Why? Well, because here the aggregate demand effect dominates. As usual, when the aggregate demand effect is the main one, a lower interest rate increases demand for employment. But you see that once you get close to this traditional R-bar, labour demand becomes non-monotonic. Why? Because when the interest rate drops below R-bar, firms switch their production technique to the high automation, high capital intensive one, this increases labour productivity and this provides a drag on labour demand. So here the first interesting thing about this framework is that contrary to what would happen in the New Keynesian model, labour demand and the interest rate have a non-monotonic relationship over a certain range, perhaps surprisingly, a drop in the interest rate might decrease equilibrium employment. What are the implications for monetary policy? So let me start by thinking about a simple case in which monetary policy seeks to stabilise the economy around full employment, around the level of employment equal to all-bar, which is also the level of employment consistent with zero inflation, with inflation being equal to target. So here this monetary policy stance is captured by this red vertical line, a steady state of the model is given by intersection of this line and firms' labour demand and as I draw it here there is a single intersection, so a single steady state, which is associated with that particular value of the interest rate. Now this is a possibility, but it's not the only one. So you might also have cases in which the two curves intersect more than once, in which there are multiple steady states consistent with the economy being at full employment and inflation being equal to target. For instance here I have three of them. So let's forget for a second about the intermediate one, which is unstable, but let's think about the two extreme. So the upward steady state is one in which the interest rate is high, so one in which aggregate demand is weak. Why is the economy operating at full employment despite of weak aggregate demand? Well because the high interest rate induces firms to rely more on labour than capital in production and this sustains firms' labour demand. So this low use of automation technologies is what reconciles full employment with a weak aggregate demand. The steady state down there, instead, is associated with strong aggregate demand because the interest rate is lower. How can this be consistent with an equilibrium? Well the low interest rate also induces firms to use more intensively machines in production. This boosts labour productivity and it allows firms to satisfy a higher level of demand with the same level of employment compared to the other steady state. So here the lesson is really that there are multiple strategies through which a given inflation target and a given level of employment might be achieved. It might be achieved through a combination of weak demand, weak automation and weak labour productivity or through a combination of strong demand, strong use of automation by firms and strong labour productivity. So also consider that the steady states are associated with different value of the interest rate. This means that in our framework there is a single value of the natural interest rate in the long run. There are multiple ones. Because each steady state is associated with a different value of the natural interest rate which are associated with different uses of technologies and different labour productivity. Okay, so now let me show you a little bit the dynamics of the model. Let's start from a classic experiment. Let's say that there is a temporary monetary tightening. So that the central bank engineers a temporary increase in the real interest rate gradually goes back to its initial value over time. Now, there are many lines in this graph so perhaps you cannot see, let me just explain in words. So in the short run this monetary hike is perfectly conventional effect. So in the higher interest rate the price is aggregated demand. So this generates a recession, output drops. In the short run capital is predetermined so the drop in demand is accommodated by a drop in employment. So firms start fighting workers because that's the only margin of adjustment that they have in the short run as unemployment increases wage inflation drop and inflation drops as well. In the short run the response of the economy is perfectly conventional. What happens in the middle run however is a little bit more new and more interesting. Well, because the high cost of capital induces firms to accumulate their capital stock to disinvest and moreover it induces them to switch from the high to the low automation technology to de-automate the production process. And as you can see this generates over the medium run a drop in labor productivity. And you can see this also by the fact that the recovery in employment is much faster than the recovery in output. Why? Because this medium run drop in productivity means that in order to satisfy the initial level of demand now firms have to employ more workers. So here this monetary policy action has a transitory impact on employment but a persistent impact on firms use of technology and labor productivity. What about inflation? You see that inflation has a fanky behavior because inflation drops in the short run which is what we would expect but then it rises. Why does it rise well? Because of tourism. On the one hand lower labor productivity increases firms cost and pushes firms to increase their prices. And second since we have this very swift recovery in the labor market sustains wage inflation and it's another source of inflationary pressures. So you can see that the response of inflation to a conventional tightening might be no more monotonic over time. Let me show you another experiment perhaps a more novel one. Let's think about a case in which monetary policy brings the economy from the high automation steady state to the low automation one. How can this happen? Well through a gradual increase in the real interest rate, a gradual monetary tightening. Once again in the short run the economy is perfectly conventional. So the higher interest rate reduces aggregate demand and we have a recession. Again the capital stock is predetermined so this initial recession is associated with a very big increase in unemployment and a very large drop in inflation. But over the medium run, once again firms react to the higher cost of capital by accumulating their capital stock and by automating their production process. So this increase in the interest rate generates over the medium run a drop in labor productivity. And actually in this case since we are moving from one steady state to the other, this process of the automation becomes self-sustaining in the sense that even if employment and inflation go back to their initial value we have a permanent impact on labor productivity and a permanent impact on output. You can see from this example even perhaps more starkly that in this model monetary policy action might have a transitory impact on employment and inflation but a very persistent one on firms use of automation labor productivity and end output. Alright, so now let me show you the second set of results which is about the possibility of a trade-off between sustaining automation or employment for the central bank. Let me go back to the steady state graph and let me just modify it a little bit by assuming that the central bank might be constrained by a lower bound on the interest rate. The central bank would like to stabilize the economy around full employment but it might not be able to because of the existence of a lower bound on the interest rate which is captured graphically by the horizontal portion of the monetary policy curve. So as I draw it here this lower bound is not a problem since the three steady states are consistent with an interest rate above it so the central bank can just pick which steady state it prefers. Now let's think about a case in which a labor demand. So a persistent drop in aggregate demand moves down labor demand by firms because for any level of the interest rate now aggregate demand is weaker so firms' labor demand is weaker and as you can see here the full employment, high automation steady state becomes unattainable. Why? Because in order to get there the central bank will need to set an interest rate lower than the lower bound but that's not possible. So now the central bank is facing really a choice where it can stabilize the economy on the lower steady state one which is in which the interest rate is low so the use of automation technologies is high but in which aggregate demand is too weak to maintain full employment there is some involuntary unemployment or it can stabilize the economy up there the steady state in which the economy operates at full employment but that's so because firms use the low automation technology and so labor productivity is low and this is what is maintaining the economy at full employment so this is telling you that during times of weak demand central bank may face a choice between sustaining employment or firms use of automation and labor productivity and another way to see this result is that we typically associate period of weak demand with unemployment and inflation with liquidity traps in which unemployment is high and inflation is lower than target what this model is telling you is that this is a possibility but not the only one a period of weak demand might also show up into low labor productivity low investment, low use of available automation technology without having much of an impact on employment and inflation so employment and inflation are not necessarily a good indicator of whether aggregate demand is strong of weak in this economy and this might look like a theoretical curiosity but actually there are some commentators which have argued that this might explain part of the experience of the UK after the financial crisis in the UK employment recover pretty quickly from the financial crisis but investment and labor productivity did not and there are some commentators that argue that what happened is that firms started to rely less on capital and more on labor in production so weak aggregate demand show up into weak investment and weak productivity growth let me show you the last result of the paper which is about what happens if there is a rising automation so what happens if we make some discoveries that allows firms to automate more the production process here this is simply captured through an exogenous increase in this index JH in the number of tasks that firms potentially can automate now the interesting case is the one which I'm showing you in this graph so when there is an increase in this automation frontier if firms are using the high automation technologies they need less labor to satisfy a given level of aggregate demand that's why firms' labor demand curve shift toward the left for value of the interest rate associated with the high automation technology and from this graph you can see really two things the first one is that in order to maintain full employment the central bank may need to react to this kind of technological progress by lowering the interest rate by sustaining aggregate demand because now that our production possibility we need more demand to keep the same amount of workers employed and the second result is that this type of technological progress might generate a liquidity trap a case in which the central bank ends up being constrained by the lower bound and it might generate some technological unemployment which is something that came for about many many years ago why because now that firms can rely more on machines compared to workers to produce if the central bank or fiscal policy do not sustain aggregate demand they will just fire workers and replace workers with machine so there will be some technological unemployment and you see that once again here we have a tradeoff between sustaining automation and employment because here in order to maintain the economy full employment the central bank will need to hike the interest rate to induce the automation of the production process so as to induce firms to employ more workers ok so this is pretty much what I said let me wrap up so the main message of the paper is really that monetary policy besides affecting traditional variables such as employment and inflation can also have impact on non-traditional one can be non-neutral with respect to firms technological choices and labour productivity and one interesting aspect is that the traditional effect and the non-traditional one may operate at different time horizons so in the short run the economy might react to changes in monetary policy in a very conventional way mainly through the employment and inflation margin but over the medium run the automation effect might be clean so we might see a response in firms use of technologies and labour productivity and this might generate interesting behaviour for instance it might generate a non-monotonic response of inflation to a monetary tactic the second message of the paper is really that in the short run weak aggregate demand rather than showing up into high unemployment and low inflation might show up into low investment and low labour productivity so perhaps if we want to understand whether demand is high enough we might look at other indicators compared to the standard labour market in prices one and moreover this means that the spell of weak aggregate demand like in the secular stagnation type of literature might impose the central bank in front of the dilemma whether to sustain employment or to sustain automation and labour productivity and the final message is really that periods in which technological progress skewed towards automation is very fast which some others have suggested that is the case nowadays may call for expansionary policies otherwise this might generate technological unemployment and then push the central bank in front of this trade-off between sustaining employment or the use of automation technologies ok, thank you ok, so thanks a lot for inviting me to discuss this paper I did try to convince my avatar to do the discussion but the avatar refused so no robots there so the big picture here I sort of think of thinking about two trends we have seen in the economy over the last few decades so here I have shown in blue the labour share in the United States in orange is the long-run real interest rate and we see if you look from the early 1980s onwards we see this mark dropped in the labour share that has been discussed a lot and we see this ever-dropping long-run real interest rate so think about those trends they of course have been discussed a lot so what are the factors that lie behind the drop in the labour share one could be what Jean talked about yesterday, regulations so increasing markups because of market power another one maybe labour unions losing power so therefore an increase or decrease in labour share from that or it could be automation which is sort of what we think about in this paper here what about the declining real interest rate again we know a lot of explanations possible explanations of that demographics, low productivity growth maybe increase in idiosyncratic risk or the Chinese savings lot so those things have been discussed a lot and the question is where does monetary policy come in with respect to these long-run trends and I think the standard answer is that it really doesn't because the standard view would be that the monetary policy might impact on the labour share but it would sort of be a temporary impact and it would happen through markups and what about the long-run real interest rate well again we think monetary policy is sort of manipulating the short or medium-run real interest rate is not the determining factor of the long-run real interest rate so we sort of think of those as things that are divorced from monetary policy this paper here comes up with a theory that sort of goes against this and the theory is one in which monetary policy may have a medium or long-term effects on productivity and on real interest rates and the key challenge of this here is first of all effects of monetary policy on productivity through automation choices and second of all a relationship between wealth and real interest rates in the model here and then the two are put together and what Luca shows in the paper together with Martin when you do this you can get these unconventional effects of monetary policy on productivity, employment and inflation they also show that you might use a fiscal policy to improve productivity without inflationary cost and you get this possibility which some central banks might like that it might be good to run the economy hot if you want to escape equilibrium where you have low employment and productivity and no productivity okay so how does this come about so there are basically three things going on in the model so the first one is an technology choice think about sectors around the horizontal axis and then on the vertical axis I'm plotting the productivity of capital and labour factors for which you can use capital up to some J8 and then a subset of factors for which you can use labour and where they overlap these there is a choice for firms whether to use capital or labour and the choice of that will obviously be determined by what is the most cost effective so the ratio of the real wage to the cost of capital relative to the productivity is there okay so that's the first thing second of all is a case in which wealth enters into utility function so we used to working with models where we have the utility of real cash balances here there is a utility of holding real wealth and because of that when you work out the oil equation now also depends on the level of future consumption so therefore on wealth so this will generate a long run trade off between consumption and the real interest rate and then thirdly sticky nominal wages are just partially to changes in employment and because of that monetary policy has real effects okay so what you get then is you get this sort of labour demand diagram here there's a downward and slip part of it, standard part and then there's a horizontal part and that's where you sort of start adopting these robots yeah okay so this is not monotonic because of the automation choice and now if you allow the central bank to sort of set the policy so as to target full employment you get this possibility that you might end up in a high automation equilibrium with a low cost of capital or in a low automation equilibrium with a high cost of capital and the two differ in productivity and therefore the high automation equilibrium is better one you have higher welfare that's sort of the static picture but you put that together now with this IS curve and then you can show that dynamically you may also have the free equilibria and these two extreme equilibria they are both stable, subtle part stable equilibria so therefore even if monetary policy aims at full employment you may end up in a good or bad equilibrium and last shocks here they may shift the economy but it's important that this happens only because we have wealth in the utility function if it didn't have that then it would be a single equilibrium and it would be stable but with the sloping long run sloping IS curve we get this possibility of multiple equilibria and here what they show is that if you have a temporary but very large tightening of monetary policy you may, what you're going to get where you shift basically from one from the good equilibrium to the bad equilibrium over this path of the real interest rate there you may get this persistent productivity slump and you get this inflation reversal so that the monetary tightening becomes inflationary we wouldn't hope that's the case right now but yeah, let's hope so and in the same case when we have the multiple equilibria if we have a permanent rise in the real interest rate then we can go from the good to the bad equilibrium permanently so that's sort of what we get here and on the reverse of this that of course means that you might want to run the economy hot to escape a bad equilibrium so allow some inflation and you end up in a good equilibrium in which you have low cost of capital and high automation so that I think is what is going on here so comments first I think it's great paper it's full of ideas and the model is very simple but you get a lot out of it it's also provocative you get these unconventional impact of monetary policy you might want to run the economy hot you can use fiscal policy stimulate the economy like crazy don't get an inflation but you get high productivity you can restore high productivity and then you might want to think about designing monetary policy to account for automation as well it's also actually, although it's preliminary it's extremely well written paper so a lot of respect there come these are more questions than comments okay so the first one is that in the case where we have a unique equilibrium at least there I think automation is more about distribution and productivity I think in the case that they had before but instead of having this like extreme jump from low to high automation it sort of happens gradually so as we go across sectors here these relative productivity differences change and here if I have an increase in automation because I'm an increase in capital productivity what we get is that the productivity effects are really marginal because where you automate the productivity differences are very small so it doesn't do so much about productivity automation here in this case but it does do a lot about distribution the labor share does change a lot so I think maybe I would sort of think it would be nice maybe to sort of refocus the paper a little bit towards distributional issues rather than productivity because that I think is the general case of automation secondly one might question how sensitive are technology choices to monetary policy over the frequencies that monetary policies can affect real interest rate we would think for many of these technologies there might be significant fixed cost of adopting a new technology it's not capital deepening it's not doing more of the same and doing something new and that probably does take some fixed cost there to do that so therefore what we should look at longer-term real rates and here I just stole out of Peter's paper with Mark Gertler what happens with the longer-term real interest rate when we have a monetary policy shock two-year rate moves not so differently from the short-term rate but if you look at the five-year ten-year rate then it doesn't seem to be so much action here and we think that they probably are more important for long-term decisions like automation but it would sort of be interesting to see whether we do get any empirical evidence that monetary policy impact on automation we know on TFP there are papers around on that but do we have direct evidence on monetary policy on automation thirdly we key thing in the paper to get the multiple equilibria is that we have this downward-sloping Euler equation or IS curve if you think about that in the cross-section so here I thought about so just write down that in the cross-section what this implies in cross-section is that higher wealth households have higher savings and if you look at that so here I just taken a plot out of the paper by Fagering Blumhoff-Holm, Moll and Natvik if you look in red that's the growth savings rate plotted against their wealth and that's true that's upward-sloping but if you take out capital gains then it's totally flat so it's true that higher wealth households they save more but it's because of capital gains that's entirely where it comes from and that's not really what's going on here so maybe one might think that the Euler equation might be negatively sloped in the short run but I wouldn't have thought in the long run unless we introduce other features and that case we'd have a unique equilibrium that case monetary policy couldn't do this stuff in the long run there will still be stuff in the short run though that's still interesting I think what about the fourth thing you get here is that so the paper shows that when there's a lower bound on the real interest rate it's not a zero lower bound on the normal rate but on the real rate then you may get that a saving slot that can that there's a policy choice between automation and unemployment and you might get that increased automation can generate liquidity trapped with unemployment and we know so in those cases what you can do is you can use fiscal policy to restore the desired equilibrium do a big fiscal expansion basically to drag you out of this bad equilibrium here this we know from standard new Keynesian models this happens even without automation when we're at the zero lower bound we can get large fiscal multipliers and large fiscal interventions they can route out liquidity traps like in the paper for Benhabit, Pankapoi, Evans or in Michaud's work but I think here the thing is that once you put this actually into calibrated models although it's true you can do that those fiscal interventions they need to be very large it's like taking fiscal spending up to 60% of GDP which we haven't seen and probably we don't want to see that see that tested in practice so yeah so it's true you sort of get this but whether actually you can do this with fiscal policy I think maybe a little bit yeah you could question that okay final comments I think this is exciting research time to get structural issues and monetary policy I would question no I mean we do give you guys here at the ECB and other central banks a lot of jobs okay give us also full employment give us financial stability handle the green transition think about inequality and now okay do automation too so another job on your list there I would sort of thought if you can do what is in the first bullet quite happy what can central banks do about technology choice I think would be interesting to look at what the data says on this here finally are there better instruments maybe for structural issues here so if if we have low automation may it be that we should think about education or infrastructure rather than monetary policy or this fast adoption is an issue maybe promote reskilling and things like that rather than monetary policy okay let me stop but nice paper thanks a lot Luca you may want to answer these four questions and comments thanks a lot for the discussion it's really excellent and you give us a lot of food for thought and I agree with all your comments I would say a couple of reactions let's start from the end one of the message of the paper is that even if the central bank just cares about inflation and employment automation might play a role because it might affect how changes in monetary policy mediate into these other two variables so perhaps even if labor productivity or automation may not be per se a useful target for monetary policy understanding this effect might be important to understand how changes in the interest rate and the policy rate may affect the labor market or inflation another thing that I wanted to mention is that which actually thanks for giving me a chance to talk about this is that you mentioned the empirical evidence and that's very important because we see this paper is really providing a framework to invite more empirical research and one thing that this framework is telling you is that both empirical evidence that we have on monetary policy shock might not be useful to dig out these effects because these effects only show up at certain moments they only show up if monetary changes are large and persistent or if the economy is not already exploiting all the automation possibility given by our technological knowledge it also tells you that there might be some trace of the effect as you mentioned that the decision whether to invest in automation or not may be subject to fixed costs so we may see a lot of inaction for some value of the interest rate and then once the interest rate crosses a treasured we may get some big action which is a bit what this model is capturing so we think that this framework is useful to try to dig out how to measure in the data whether these effects are there or not and then the last comment I'm also glad that you emphasized this reverse result because I talk about monetary but this model tells you that the opposite is also true that a monetary expansion overheating that a fiscal expansion might in the medium to long run increase labor productivity and perhaps output though also what the model is telling you is that this doesn't come for free because in the short term the economy is very conventional so if you have a fiscal expansion in the short term this is going to be inflationary so this might generate in the medium running this is in use of automation technologies or labor productivity but we need to wait the short run inflationary costs against the potential long run benefit likewise the same applies to running the economy here monetary policy may increase productivity in the medium run by overheating the economy for a while but this is going to come at the cost of high inflation in the short run and then definitely we need to do more work to understand what the terms this trade off this depends on the state of the economy or some structural features of the economy again we think that the framework is useful to think about this kind of trade off but thanks a lot excellent discussion I see already a number of questions please Alex Popov, ECB so when we think of automation indeed we imagine robots displacing people most of the time so I guess in the construction you can dig a hole in the ground using 10 workers with spades or you can use one worker with an excavator so in that world robots and workers are really substitutes but there can be labor augmenting automation for example a very skilled surgeon using a very sophisticated robot to perform a very difficult operation and even when automation is labor displacing it can create new tasks where workers have a or labor has a comparative advantage this is something that Hachemoglu and Ristrep will call labor reinstating effect in a recent paper so I was wondering if you bring into your model these other properties of automation would your insights change dramatically thank you do you want to answer that? one thing is that here you know I mentioned robots because they are the catchy way to think about automation in reality the biggest automation technology is ICT that's really where the action is and you know you're right there might be some technological discoveries that are complement to labor here we want to think about types of technological discoveries that substitute labor and as you said knowing Hachemoglu and Ristrep there is this counterbalancing force that we invent new tasks that labor can perform which counterbalance the new automation discoveries here the last part of the paper was really thinking about a period in which technology skew toward automation which I think what has happened over the last 20-30 years but this doesn't mean that it's going to be the case in the future too and it would be interesting to use the framework to think about different types of technological progress Francesco so I have a question I think one point that Martin raised about the different frequencies of which this phenomenon operates that seems very important to me and it seems to me that the model the way it's written is really not prepared to handle this because for instance the linearity in this intermediate region makes the two technologies perfectly substitutable and that's what gives you the jump below and above and below our bar right so say that you make this substitutability kind of imperfect then you would have an area of continuity you had fixed cost you would have even more continuity so we understand that when we freeze prices we assume you can control real variables for the long run such things can happen but I think it's very important to give credibility to the paper message to show that this is actually somewhere in the data I wouldn't use the threshold effect as an excuse to say well it's hard but that's what you have to show if you want to change the conventional view that this phenomena can happen at different frequencies and related to this I was wondering if I'm a firm entertaining the possibility to make an investment then and there are these fixed costs that I must be forward looking so kind of the interest rate that matters to me is not the interest rate today some present value of the interest rate I expect to pay and so even that would seem to dwarf you know these jumps at our bar don't you worry about these things don't you think it would be really important to show how many are related both in the data and in the theory yeah I know I agree with you know in reality we expect a smoother relationship between changes in the interest rate and use of automation technologies we actually study that case in the paper qualitatively the results are the same and you know about what you say I think the fact that the model has multiple city-state makes it interesting because you know it tells us that we don't need to have any permanent impact on the interest rate to have an effect on automation in the sense that you know you can have if you are close to the tipping point if you have even a reasonable change in the interest rate that might bring you to part of the economy when the automation process becomes self-sustaining that is when even if the interest rate is equal to the natural one so we are we become we follow the part of the economy under flexible prices you know the process becomes self-sustaining so that a temporary monetary intervention might generate a long-run impact on the use of automation and this also tells us that the impact of monetary policy intervention on the economy might be very state-dependent monetary policy intervention might have a different impact if you are far away from the tipping points or from this region where firms start changing their technology in response to a change in the interest rate or if you're very close to it so that's why we think that the cost of the state is interesting because it tells you that even temporary intervention might trigger self-sustaining changes in automation but I mean I agree with you definitely we need to think better about you know we see this paper really as the first step at the question as a way to organize thoughts and to invite more empirical research Vita so it's a fascinating presentation let me ask so you concentrated on monetary policy but it seems to me that the question of capital versus labor taxation might also be kind of influencing these results it might be that fiscal policy by changing the relative costs of capital versus labor could actually achieve this potentially much more persistently than monetary policy but the question is have you thought about this and what do you think and another question is what if you have both low-skilled and high-skilled labor in your model and it might be that then low-skilled labor might not be able to work with more for example ICT and then it might not be as clear that one equilibrium is better in terms of the low-skilled labor so they might prefer kind of a low-automated equilibrium so it might change some of your welfare conclusions just what do you think about your hinted fiscal policy you're totally right now there is a literature suggesting that fiscal policy might affect the cost of capital relative to the wage to change the taxation and that might have an impact on the use of taxation and when we started we want to think about that as well but then we chose to focus the paper on monetary policy but you write that fiscal policy might have potentially bigger impact on technological choices that monetary policy and about the idea of looking at the impact on different skilled workers it's super interesting which goes back also to what Morten was saying before that there are some interests in distributional implication when we started we wanted to put them in but then we thought ok there's too much stuff let's focus on a simple model in which we have just one type of workers and perhaps a future step in the research agenda we should also incorporate these effects and let me also mention that the welfare properties of these multiple steady states are not so clear it's not clear that you might necessarily want to be in the high-automation steady state for instance if the high-automation steady is associated with unemployment then there is a trade-off so depending on the way that you attach to labor productivity versus employment you might be in one or the other we don't touch on this question with this paper once again because we thought that just taking a positive perspective was interesting enough to write a paper about it but I think that there is a lot to say about welfare too it's not clear that there is a good equilibrium and a bad equilibrium it depends a lot and once you introduce heterogeneity this becomes even more true because then you introduce distributional issue between capitalist and workers and between different types of workers and these are questions that we think would be very interesting to explore in the future Michele Thank you I have two questions so the first one is I suppose in your model there is a symmetric friction the wages are rigid to the upside but most of the time we think the wages are most rigid to the downside and what would happen if you take this downward wage rigidity so my hunch is that then when there is a monetary loosening labor becomes even more expensive than what you have now in your model and then there would be more boost towards automation and the second one is have you thought about the narrative over the last 15 years so we have had very low interest rates in Europe and in the US but no productivity boom so what has invaded to the mechanism that is in your model to act because I would have expected if I well understood what your point is that we should have seen really a strong boost productivity which we didn't see in the data of course many other things have happened but did you think about it Yeah about your first point that's very interesting because it hints at possible non linearities we are thinking about a case of downward wage rigidity which I think empirical is very relevant then the effect of a monetary expansion would be very different than a monetary contraction so a monetary expansion would mainly have an impact on inflation right while a monetary contraction may potentially have an impact on labor productivity and automation once again here we started with the symmetric case which is the simplest but perhaps in reality the effects are symmetric so monetary tightening might have very different impact than the monetary loosening and about the correlation between interest rate and productivity so here we are looking at a change in the interest rate keeping everything as constant in reality there are many things affecting the economy so what the model will tell you is that if we didn't have this drop in the interest rate, labor productivity would have been even lower let me mention though again going back to the United Kingdom which I think is an interesting case there are some models that have argued that the financial crisis brought about this increase in spread, this increase in the cost of capital for firms, another fiscal policy was tightened and they said in this environment first choose to reduce investment and reduce the use of machinism production rather than firing workers and so that triggered the automation process of the economy there is one question on slide though so let me read it out what does the author think about firms taking into consideration the long run cost of using capital versus labor while substituting one for the other well yeah here first we react if the cost of capital changes in the medium to long run so here we are not thinking about changing the interest rate taking place in a single quarter, we are thinking about more persistent intervention but once again the fact that there are multiple steady state means that monetary policy even if it doesn't affect the interest rate for many years may push the economy over a tipping point after which this kind of process becomes self sustained but yeah of course firms automation decision will depend on medium run interest rates there are no more questions from the floor than we stop here, thank you very much very nice session