AI Boom Complicates Central Banking

Central bankers aim to maintain stable prices, a strong job market, and a sound financial system. However, the AI boom is making this task more challenging. According to a new paper from the Bank for International Settlements, AI is simultaneously affecting the supply and demand sides of the economy, driving both structural and cyclical change. This is making it difficult for central bankers to rely on their usual rules of thumb when setting policy.

In the US and other countries where AI innovation is thriving, an investment boom is creating a surge in demand, particularly for semiconductors and other data center components. This, in turn, is creating more consumer demand and driving up stock prices. However, there are concerns that some of this wealth is illusory and that an AI bubble may eventually burst. Additionally, there are risks that AI could lead to large-scale job losses in the medium term, although evidence of this is currently limited.

The Bank for International Settlements paper notes that the effects of AI on the economy are highly uncertain, making it challenging for central banks to make informed decisions. The paper's authors, Iñaki Aldasoro, Leonardo Gambacorta, Enisse Kharroubi, and Matthias Rottner, write that AI affects both demand and supply in complex ways, making it difficult to assess underlying trends. This increased uncertainty raises the risk of policy miscalibration, where central banks make decisions that are not in line with the actual state of the economy.