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Technological change to challenge monetary policy but could raise output, Bank of Canada governor says

Nov 14 (Reuters) - The widespread adoption of new technologies is making it harder for central banks to manage monetary policy but could also boost potential output, Bank of Canada Governor Stephen Poloz suggested in a research paper on Thursday.

In the paper that will form the basis of a speech he is set to give in San Francisco later on Thursday, Poloz said change stemming from technologies like artificial intelligence, big data and machine learning is hard to measure and will challenge central banks already facing considerable uncertainty.

“Although we are understandably focused on the consequences of rising geopolitical risk and the potential consequences of a global trade war, we should not forget that other longer-term structural forces remain at play,” Canada’s central bank governor wrote.

Those forces, he said, included the digitization of the global economy, also known as the fourth industrial revolution, which could cause significant disruption in labor markets as well as the broader economy.

“Assertions that the economy is picking up speed due to a technology-led positive supply shock that will prove to be disinflationary so that interest rates can hold steady, or even decline, will be impossible to prove until long after the fact,” Poloz said, a reality that could challenge central banks.

But history may also provide insight to a possible course of action.

“The prescription for monetary policy over the longer term is likely to be very much like that of the Greenspan era,” Poloz wrote, referring to former U.S. Federal Reserve Chair Alan Greenspan, who headed the Fed from 1987 to 2006. Greenspan held interest rates steady despite a very strong economy because he believed a positive technology shock was holding back inflation.

“While inflation remains subdued, we should allow growth to run, for this is a good way of providing upside potential to those negatively affected by new technology,” Poloz said, before adding central banks “will need to monitor carefully developments in the financial stability space.” (Reporting by Kelsey Johnson in Ottawa; Editing by Peter Cooney)