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Artificial intelligence, the natural rate of interest, and monetary policy

Author

Listed:
  • Lucia Esposito

    (Bank of Italy)

  • Andrea Fabiani

    (Bank of Italy)

  • Elia Moracci

    (Bank of Italy)

  • Andrea Papetti

    (Bank of Italy)

  • Massimiliano Pisani

    (Bank of Italy)

Abstract

This paper evaluates the macroeconomic effects of artificial intelligence-driven productivity gains under alternative monetary policy rules by using a New Keynesian model calibrated to the euro area. AI-driven productivity gains raise output but have ambiguous effects on inflation. A sudden productivity increase is generally disinflationary, as supply expands faster than demand, whereas gradual productivity gains or stronger investment demand tend to be inflationary because aggregate demand responds more intensely. Across various scenarios, monetary policy achieves better inflation and output stabilization when it tracks the evolution of the natural rate of interest, r*, or responds more strongly to inflation, rather than reacting to the long-run value of r*. The results suggest that, because the evolution of r* is difficult to assess during periods of AI-driven structural change, inflation may provide more reliable guidance for policy decisions.

Suggested Citation

  • Lucia Esposito & Andrea Fabiani & Elia Moracci & Andrea Papetti & Massimiliano Pisani, 2026. "Artificial intelligence, the natural rate of interest, and monetary policy," Questioni di Economia e Finanza (Occasional Papers) 1066, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_1066_26
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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