Lane: AI's net effect on natural rate of interest uncertain

Philip R. Lane outlined AI's potential to create inflationary pressures through increased demand, as households and firms anticipate future income growth.

However, he noted that a slower consumption response is more plausible, given individual uncertainty and habit formation, which would temper initial inflationary effects.

Lane also discussed how AI's impact depends on whether it is labour-augmenting, boosting worker income, or capital-augmenting, increasing inequality and potentially dampening overall demand.

The substantial upfront investment in computational infrastructure and the rising energy demand for AI are also likely to add to inflationary pressure during the adoption phase, until energy supply can catch up with the increased consumption.

The geographical distribution of AI activity will also influence regional demand effects.

Lane discussed AI's uncertain influence on the natural rate of interest (R*).

Optimism about productivity gains could push R* upwards by boosting investment and reducing savings.

Conversely, uncertainty regarding AI's income trajectory and distribution might limit R* increases, potentially raising precautionary savings.

The time profile of R* depends on adoption patterns: an S-shaped curve suggests R* eventually returns to pre-AI levels, while AI improving innovation could lead to a permanently higher R*.

Investment rates are expected to be volatile due to demand complementarities and fluctuating financial market sentiment.

Concentration of AI production outside Europe could also exert downward pressure on R* in the euro area.