Optimal monetary policy under digital technology shock

This study investigates how digital technology shocks can transform monetary policy. Using macroeconomic data from China from 2005 to 2022, this study empirically tests the time-varying dynamic correlation between digitalization, money supply, and output using the TVP-VAR model. The results show that the stimulating effect of loose monetary policy on output has gradually weakened in recent years. In contrast, digital technology has gradually become a new driving force for economic growth. Furthermore, this study incorporates a digital technology R&D department into the standard DSGE model and internalizes digital technology within the economic cycle to analyze the macroeconomic effects of digital technology shocks. Numerical simulations show digital technology shocks can effectively stimulate output and suppress inflation. Moreover, the central bank's welfare utility is maximized under a price-based, quantity-assisted monetary policy. Finally, this study begins with the price stickiness perspective to explain how digital technology weakens the effectiveness of monetary policy. This study enriches the literature on monetary policy regulation and provides insights for monetary policymakers to address the challenges the digital economy poses.