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

Lucia Esposito, Andrea Fabiani (), Elia Moracci, Andrea Papetti and Massimiliano Pisani
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Andrea Fabiani: Bank of Italy

No 1066, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: artificial intelligence; technology shock; monetary policy; New Keynesian model; simulations; euro area (search for similar items in EconPapers)
JEL-codes: E32 E52 O33 O40 (search for similar items in EconPapers)
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_1066_26

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