AI reshapes monetary policy transmission and stability risks
A Banca d'Italia study assesses how artificial intelligence alters monetary policy transmission, liquidity demand, and financial stability risks. Published in July 2026, the paper examines efficiency gains and new tail risks for central banks.
Steeper reserves and faster transmission
Artificial intelligence shifts the demand for central bank reserves leftward and steepens the curve in normal times while flattening it during stress.
In credit markets, AI improves screening and monitoring, leading to higher credit volumes and faster transmission speeds.
However, the overall transmission via the borrower balance-sheet and bank capital channels weakens due to reduced sensitivity to policy rates.
Financial markets may experience increased liquidity alongside heightened stability risks from algorithmic herding and automated trading behaviors.
Inflation could become more volatile due to greater price flexibility and lower menu costs across digitized firms.
Productivity gains versus tail risks
The paper highlights that AI boosts productivity and potential output, potentially increasing the natural rate of interest through capital demand.
At the same time, rising market concentration and wealth inequality could exert downward pressure on the natural rate.
Central banks face challenges from shorter transmission lags and potential tail risks affecting real sector stability.
Enhanced real-time forecasting tools and non-traditional data sources will improve central bank reaction functions.
Double-edged digital sword
The study provides a timely framework for navigating the structural shift brought by artificial intelligence.
While powerful forecasting tools empower monetary authorities, algorithmic feedback loops introduce severe tail risks.
Central banks must retain strict human control to prevent destabilizing financial contagion.