Central banks are turning to outside experts to assess their forecasting abilities, with individuals like Mervyn King and Ben Bernanke being called upon to review methods and identify areas of improvement. Bernanke’s assessment highlighted the challenges faced by central banks in accurate macroeconomic forecasting due to global shocks and outdated systems within institutions like the Bank of England.
While some suggest using AI like ChatGPT for forecasting, central banks are already utilizing artificial intelligence in various ways. Emerging nations like Indonesia use AI to analyze public reactions to monetary policy, while organizations like the Bank for International Settlements are exploring the potential of AI in central banking. The European Central Bank’s Athena project uses AI to assist banking supervisors in identifying anomalies by scanning millions of documents.
The growth of fintech firms utilizing AI for credit allocation and investment strategies presents new challenges for central bank supervision. With the EU AI Act on the horizon, central banks and supervisors must adapt to the increasing use of AI in finance, especially as quantum computing becomes more prevalent in trading and research. The ‘One Man and his Dog’ approach suggests that AI should aid, but not replace, economists and supervisors in complex tasks.
Despite the potential benefits of AI in central banking, obstacles such as outdated IT systems, data management limitations, and a shortage of AI-savvy talent remain. The use of high-frequency datasets from payment companies and other sources could provide valuable insights for monetary policy and fraud detection. Central bank digital currencies could also generate large datasets on financial behavior that could be leveraged for more effective monetary policy adjustments.
The convergence of central bank digital currencies and AI could revolutionize monetary policy by allowing for small, frequent adjustments based on AI-driven models. However, central bankers will need to adapt their mindsets and communication strategies to effectively leverage AI to their advantage. Central banks must evolve to meet the changing technological landscape in order to enhance their forecasting abilities and improve their effectiveness in achieving monetary objectives.
