Artificial Intelligence in Central Banking: Benefits and Risks of AI for Central Banks

1. Introduction

Artificial intelligence is the imitation of human intelligence by machines or the ability of machines to perform tasks using human intelligence (Lin, 2019; Ozili, 2023a). The use of artificial intelligence (AI) systems in the financial services industry is transforming the way financial institutions use data to acquire, use and manage money, and it is changing how they serve their customers. The rise of artificial intelligence in the financial sector is also raising questions about the role of artificial intelligence for financial regulation and for central banking. This paper focuses on the latter – central banking.

Central banking is the activity performed by a central bank. A central bank is a public institution that manages the currency of a country and controls the amount of money in circulation (Goodhart, 1995). The core objectives of a central bank are price stability, financial stability, monetary stability, exchange rate management, lender of last resort, and banker to the government (Swinburne, 1991; Blinder, 2010; Ozili, 2020). Monetary stability means the provision of adequate money supply, price stability means achieving low inflation and financial stability means the absence of financial crisis or banking crisis.

Questions are emerging about how artificial intelligence would affect the operations and statutory objectives of a central bank. Some of the questions that have emerged are: Does artificial intelligence offer any benefits to central banks? Will artificial intelligence transform central banking? If so, will artificial intelligence usher in an era of modern central banking that is AI-led? Or are these questions the result of wishful thinking? The truth is: it is too early to know for sure whether and how AI would affect central banking. But what we know is that central banks are expected to respond to the pressure on financial institutions to use AI algorithm to serve their customers and to improve their operational efficiency. A central bank can participate in this process by developing a financial sector-wide AI regulatory framework. But this is not the only way in which central banks can get involved in the ongoing AI transformation of the financial sector. Apart from developing a financial sector-wide AI regulatory framework, central banks are expected to respond to the artificial intelligence transformation by using AI systems to improve central bank operational efficiency and to serve their institutional customers and the financial institutions they regulate or oversee. The decision of central banks to adopt artificial intelligence systems will be determined by the need to catch-up with technological advancement and the need to reinvent central banking to meet the modern reality of the digital world.

There is limited knowledge in the literature about the role of artificial intelligence in central banking. A lot of debates have emerged about the role, benefits, and risks of artificial intelligence for private financial institutions such as the potential for financial institutions to use artificial intelligence systems to offer customized services to customers, automate tasks, manage risks and to offer more targeted advertising to customers (Fernández, 2019; Hu and Chen, 2022). Much of these debates are focused on private financial institutions (Johnson, Pasquale, and Chapman, 2019; Königstorfer and Thalmann, 2020). However, such debates do not exist for central banks despite the fact that central banks are responsible for the soundness and stability of the financial system (Sinclair, 2000; Goodhart, 2011), and they play a significant role in financial sector development (Neyapti, 2003). Therefore, in this paper, we highlight the benefits and risks of artificial intelligence in central banking.