We provide a framework in which monetary policy affects firms' automation decisions (i.e. how intensively capital and labor are used in production). This new feature has far-reaching consequences for monetary policy. Monetary expansions can increase output by inducing firms to invest and automate more, while having little impact on inflation and employment. A protracted period of weak demand might translate into less investment and de-automation, rather than into deflation and involuntary unemployment. Running the economy hot, through expansionary monetary and fiscal policies, may have a positive long run impact on labor productivity and wages. Technological advances that increase the scope for automation may give rise to persistent unemployment, unless they are accompanied by expansionary macroeconomic policies.
