AI could have a surprising effect on interest rates

As improvements in artificial intelligence (AI) continue apace, so do questions about how AI will influence economies, asset prices and ― the question of the moment interest rates: Is AI more likely to make them go up or down?

- TYLER COWEN

You might think economists would have a simple handle on such a straightforward query, but the both macroeconomics and AI are complex. Nevertheless, I have a bold prediction: Real inflation-adjusted rates will go up, and for a considerable period of time.

The conventional wisdom is that rates tend to fall as wealth and productivity rise. It is easy to see where this view comes from, as real rates of interest have been generally falling for four decades. As for the theory, lending becomes safer over time, especially as the wealth available for saving is higher.

My counterintuitive prediction rests on two considerations. First, as a matter of practice, if there is a true AI boom, or the advent of artificial general intelligence (AGI), the demand for capital expenditures (capex) will be extremely high. Second, as a matter of theory, the productivity of capital is a major factor in shaping real interest rates. If capital productivity rises significantly due to AI, real interest rates ought to rise as well.