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

Abstract

This paper examines the effects of labor-replacing capital, which we call robots, on business cycle dynamics using a New Keynesian model with a role for both traditional and robot capital. We find that shocks to the price of robots have effects on output, employment, wages, and labor's share of income that are distinct from shocks to the price of traditional capital. In addition, the inclusion of robots alters the response of employment and labor's share to a variety of shocks and weakens the correlation between human labor and output, as well as the correlation between output and labor's share. Our results are robust to the choice of money policy parameter. Moreover, a more activist monetary policy always results in a stronger negative correlation between output and labor's share and a weaker positive correlation between output and hours in the presence of robot capital.