The impact of artificial intelligence on output and inflation

Summary

Focus

Many believe artificial intelligence (AI) will be the next general-purpose technology that will boost productivity growth. Indeed, AI adoption is already happening at breathtaking speed – in virtually all countries and industries. While AI is poised to have a profound impact on the economy, relatively little is known about its impact on employment and output across various industries, as well as its implications for growth and inflation in both the short and long run.

Contribution

We study the economic impact of AI using a macroeconomic multi-sector model calibrated to an index of industry exposure to AI. We answer the following questions: To what extent does the impact of AI on an industry's employment and output depend on that industry's direct exposure to AI? How will AI adoption affect output and inflation in the short and long run? And, to foster AI adoption, what lessons can we draw for monetary policy as well as for public policy?

Findings

We find that AI, by spurring productivity growth, significantly raises aggregate output, consumption and investment in both the short and long run. An industry's direct exposure to AI has surprisingly little impact on its long-term outcomes. Higher total demand and associated changes in relative prices and input costs matter much more than the direct initial productivity boost from AI adoption. The effects of AI on inflation are uncertain. On the one hand, by raising productivity, AI adoption boosts supply, which is disinflationary. On the other hand, firms need to make substantial investments to take full advantage of AI. This, alongside higher average incomes, will add to demand and raise inflation. The net effect hinges on the timing of these forces, which in turn depends on the expectations of households and firms regarding the transformative potential of AI and their readiness to act on these expectations. Overall, AI's positive contribution to growth could also offset some of the detrimental secular developments that threaten to depress demand going forward, including population aging, changes in global supply chains, geopolitical tensions and political fragmentation.

Abstract

This paper studies the effects of artificial intelligence (AI) on sectoral and aggregate employment, output and inflation in both the short and long run. We construct an index of industry exposure to AI to calibrate a macroeconomic multi-sector model. Building on studies that find significant increases in workers' output from AI, we model AI as a permanent increase in productivity that differs by sector. We find that AI significantly raises output, consumption and investment in the short and long run. The inflation response depends crucially on households' and firms' anticipation of the impact of AI. If they do not anticipate higher future productivity, AI adoption is initially disinflationary. Over time, general equilibrium forces lead to moderate inflation through demand effects. In contrast, when households and firms anticipate higher future productivity, inflation rises immediately. Inspecting individual sectors and performing counterfactual exercises we find that a sector's initial exposure to AI has little correlation with its long-term increase in output. However, output grows by twice as much for the same increase in aggregate productivity when AI affects sectors producing consumption rather than investment goods, thanks to second round effects through sectoral linkages. We discuss how public policy should foster AI adoption and implications for central banks.

JEL classification: E31, J24, O33, O40

Keywords: artificial intelligence, generative AI, inflation, output, productivity, monetary policy