Can technological investments and advancements be used as monetary policy tool to fight high inflation (or its prospects)?

Question

As of today (2021.12) inflation figures are high (the prospects are under discussions but risks of high inflation can be projected to the future as well) and monetary tightening is in the cards. That is certainly unpleasant fact.

However, there is one clear way to avoid the inflation - targeted, prompt and effective investments in the science and technology in the areas that create the obstacles in the production chains. Today such prompt technology innovations are quite possible because of AI and machine learning that can adapt to different areas to provide the solutions. The robotic technologies are quite reconfigurable and the robot skills can be developed simply by monitoring the video capture of the working human beings (or this is in the charts).

What I want to stress - my guess is that there are quite a capacity for the science and technology to go ahead. E.g. in many countries (including mine in the Easter Europe) there are pressure from the low-technology businesses to capture and keep people in bad jobs. If small investments are moved towards enabling those people to have more education, gather skills, experiment with innovations, they they can exchange those substinence level jobs with the jobs that really advance technologies.

So - in my mind the monetary policy should be made as the investments towards empowerment and human development which in turn creates technological progress which in turn lower the inflation and creates additional excessive capacities for the further investments, developments and growth.

I can see in my country and in my life that there are areas that are waiting for investments (especially in the building of human capacity), but such investments does not happen. E.g. in my country the biggest share from the EU Covid Resilience and Recovery funds are going the the concrete building with the current technologies and with the crowding effects in the building industries. But very small share is going to human development, education and technological progress.

I am aware that my question contains some vignettes and andecdotes and does not cite research facts but generally my question seems to be sane and could be proposal for the new kind of the tool for the monetary policy.

Is such tool considered (especially in our times of adaptable, reconfigurable and rapidly deployable software, AI, robotic and manufacturing lines and cells, including all the advancements in the additive manufacturing/3d printing) and is the consideration of such tool sane?

Answer 1

Can technological investments and advancements be used as monetary policy tool to fight high inflation (or its prospects)?

Most likely no.

1. What you describe does not even look like monetary policy.

By definition, monetary policy is the government control over money supply (see Mankiw Macroeconomics pp 85). You are talking about investment without specifying how the funds for these investments are meant to be raised.

If these funds are to be raised through taxes then this would be fiscal policy not monetary policy. You talk about the EU Covid Resilience and Recovery funds which are not monetary policy under no commonly understood definition of the word monetary policy. Recovery and Resilience Facility is literally fiscal policy.

2. Assume you are actually using monetary policy - central bank literally droping helicopter money on technological firms. This would certainly not help to combat inflation in the short turn.

Inflation is positive change in price level. Price level is determined by money market equilibrium. In simple New Keynesian IS-LM model money market can be described as

$$M/P = L(Y,i) \implies P = \frac{M}{L(Y,i)} \tag{1}$$

Where $M$ is money supply, $P$ price level, $L$ money demand, $Y$ real output and $i$ interest rate. $L$ is typically assumed to be some function: $L=a_0 + a_1 Y - a_2i$ (so it varies positively with output and negatively with interest rates).

Log-linearizing and taking time derivative of we can see that inflation basically depends on how supply and demand for money changes:

$$ \frac{\dot{P}}{P} = \frac{\dot{M}}{M} - \frac{\dot{L}}{L}$$

So inflation will increase if money supply growth outpaces the growth of money demand (which hopefully makes intuitive sense).

Loose monetary policy that could fund some technological investment would either have to come from direct increase in $M$ (central banks dropping helicopter money on firms - although this would under current rules not be legal, but lets ignore that for the sake of your question), or by lowering the interest rate $i$ so technological firms can borrow more cheaply.

Either growth in $M$ or decrease in $i$ will produce more inflation, ceteris paribus, not less, at least in short term. Extra money, can be crated and spent much faster then output can be produce. So at least in short run you should expect this to increase inflation.

In the long-run whether this would lead to more inflation or less would depend on whether change in $Y$ could more than compensate for change in $M$ and $i$. This is not impossible, there for sure are sets of parameter values $a_0, a_1$ and $a_2$ and growth rate of $Y$ for which this could happen. However, it is incredibly naive to just assume it will happen without some further empirical evaluation. If anything, just guesstimating things it would likely be the opposite. EU countries already have one of the highest spending's on R&D in the world (see world bank data), EU also recently started to have relatively expansive industrial policy for technological firms (Aiginger & Dani Rodrik 2020), yet EU countries on average grows only by around 1.5% on average (eyeballing the world bank data).

Give all of the above and the additional fact that EU is already at the technological frontier, I would be extremely surprised if increasing money supply by 1% and dumping all that new money on technological firms would produce robust economic growth higher than 1%.

3. You seem to have extremely unrealistic expectations about how quickly things like:

in my mind the monetary policy should be made as the investments towards empowerment and human development which in turn creates technological progress which in turn lower the inflation and creates additional excessive capacities for the further investments, developments and growth.

can affect growth in output.

I work in academia, and thus unsurprisingly, I believe spending on sciences and education is worth while. This is not just pure faith there is solid evidence that investments in human capital are correlated with higher economic growth rates (e.g. see Mankiw, Romer and Weil 1992). But investing in human capital is a long run investment that usually takes several years to bear fruit. Technology might be slightly faster but we are still taking about years.

4. Lastly, it is not a priori clear that it would even be optimal to fund these activities via monetary policy and not with fiscal policy.

Central banks have only one tool (monetary policy) but they already have multiple goals to pursue (most have mandate to pursue price stability as well as full employment). Pursuing 2 goals with one tool already requires a lot of compromises, now having additional goal supporting R&D and human capital accumulation, which clearly would not always be in line with the previous 2 would just make things more difficult.

I see no reason for central banks to get involved in funding R&D instead of fiscal authorities who have plenty of tools to support R&D as much as the economy can bear.