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🇰🇷 South Korea /Economy & Trade

AI a Powerful Tool for Central Banks, but Poses Risks to Financial Stability

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

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  • Artificial intelligence can be a powerful tool to innovate central bank functions like monetary policy and financial stability monitoring, according to a Stanford University researcher.
  • AI could significantly boost labor productivity within central banks, with potential annual efficiency gains of 1.17 million hours in areas like open market operations alone, analysis of the U.S. Federal Reserve suggests.
  • However, AI also presents a double-edged sword for financial stability, capable of both detecting systemic risk signals and amplifying herd behavior in markets depending on its design and objectives.

Artificial intelligence offers significant potential to enhance the core functions of central banks, including monetary policy formulation and financial stability monitoring, a senior researcher from Stanford University's Digital Economy Lab stated at a Bank of Korea (BOK) international conference.

Artificial intelligence is a powerful support tool that can innovate central bank functions such as monetary policy formulation and financial stability monitoring.

— Sophia KaziPresenting her findings at the Bank of Korea's international conference.

Sophia Kazi, presenting her paper "AI and the Fed," analyzed the U.S. Federal Reserve's budget and job descriptions. Her findings indicated that adopting AI could lead to substantial improvements in the Fed's labor productivity. By analyzing 360 job roles, Kazi estimated the "AI-augmented potential labor hours" across the Fed system, suggesting that generative AI could broadly increase knowledge worker productivity. One specific area, New York Fed's open market operations, showed a potential efficiency gain of 1.17 million hours annually.

AI could significantly increase knowledge worker productivity across the entire Fed system.

— Sophia KaziDescribing the potential impact of generative AI on the U.S. Federal Reserve.

Kazi's analysis involved scoring AI tools based on their ability to reduce task time by at least half without compromising quality. She calculated the total full-time equivalent (FTE) workforce and allocated labor hours to different functions based on departmental budget allocations. "AI is a powerful support tool that can compensate for lags in official statistics and improve the accuracy of real-time forecasts," Kazi explained. "However, it has a dual nature regarding financial stability."

AI has a dual nature regarding financial stability.

— Sophia KaziExplaining the potential risks and benefits of AI in financial markets.

While AI can proactively detect systemic risk signals through the analysis of large volumes of unstructured text, its participation in markets through AI agents could either mitigate or amplify herd behavior, depending on the system's design and objectives, she warned. Kazi also noted that central banks lag behind the private sector in AI adoption due to structural constraints like strict public accountability and bureaucratic procedures. Additionally, outdated technological infrastructure and inter-departmental barriers hinder the effective use and sharing of data for AI training.

Central banks are lagging behind the private sector in AI adoption due to structural constraints.

— Sophia KaziIdentifying challenges faced by central banks in implementing AI.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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