Macroeconomic Fragility Effects of Financial Innovation: Behavioral and Decentralized Finance and Artificial Intelligence

Dimitri B. Papadimitriou

Economics Working Paper Archive from Levy Economics Institute

Abstract: There seems to be a building consensus of global uncertainty and instability. This can be observed not only from surveys, the media, and country reports, but in the recent speeches by members of the Federal Reserve Board of Governors. The Fed speeches focus on financial stability, not the usual price stability, but that of the financial system. Not surprising, given the unstable conditions of the US economy emanating from the geopolitical conflicts in the Middle East and elsewhere, is the excessive volatility and overvaluation of the equity markets and the public sector's erratic fiscal and trade policy stance. Reports show that equity funds loaded with AI investments--what we may call "emotional investments"--are now looking to unload them in the financial market, adding more fuel to market volatility that may cause a financial crisis, reminiscent of previous crises. The solution may lie in the implementation of a totally new economic regime in answer to recurring macroeconomic fragility. This paper considers the current conditions of macroeconomic fragility. It explores the challenges and risks to financial system stability that emerge from innovation-developed and increasingly decentralized finance--including the effects of cryptoassets, tokenization of digital assets, and artificial intelligence.

Keywords: Minsky’s instability; decentralized finance; behavioral finance; financial system stability; cryptocurrencies; Artificial Intelligence (search for similar items in EconPapers)
JEL-codes: E42 E58 G23 G41 (search for similar items in EconPapers)
Date: 2026-05
New Economics Papers: this item is included in nep-pay and nep-pke
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