AI transition exerts opposing forces on natural rate of interest

The macroeconomic impact of artificial intelligence depends on how rapidly households and firms adjust spending to expected income gains.

A sluggish consumption response occurs if consumers face uncertainty over employment or exhibit habit formation.

Inflationary pressures during adoption depend on whether technology is labor-augmenting or capital-augmenting.

Capital-augmenting AI increases income inequality between capital owners and workers, dampening aggregate demand expansion across sectors.

Additionally, building required computational infrastructure demands significant upfront capital expenditure.

This expansion in compute capacity drives up energy demand, placing upward pressure on commodity prices during the transition phase.

Competing transition mechanisms create contrasting effects on the natural rate of interest, known as R star.

Optimism surrounding productivity gains boosts investment and lowers savings, pushing R star upward.

Conversely, uncertainty about income paths or labor displacement increases precautionary savings, putting downward pressure on R star.

If AI investment remains concentrated in the United States and China while European adoption lags, capital outflow could further reduce European R star.