LIST OF ABBREVIATIONS 7

LIST OF FIGURES 8

LIST OF TABLES 8

EXECUTIVE SUMMARY 9

1. INTRODUCTION 10

2. AI ADOPTION AND EURO AREA INFLATION DYNAMICS 11

  2.1. The Supply Side 11

  2.2. The Demand Side 13

  2.3. Under what conditions is AI inflationary versus disinflationary? 14

  2.4. AI Production, Adoption and Regional Inflation 16

    2.4.1. The AI supply chain and Europe’s position 17

    2.4.2. What producing AI adds beyond access 18

    2.4.3. Adoption and complementary investment 18

    2.4.4. Consequences for regional inflation 19

3. AI AND THE ECB REACTION FUNCTION 20

  3.1. Implications of AI for the Natural Rate of Interest, R* 20

    3.1.1. Productivity and investment 20

    3.1.2. Production geography and relative R* 21

    3.1.3. Income, saving and adoption 21

    3.1.4. Slack indicators and diagnostic complications 22

    3.1.5. Assessment for the ECB 22

4. MONETARY POLICY TRANSMISSION UNDER AI DIFFUSION 23

5. IMPLICATIONS FOR THE ECB'S ANALYTICAL TOOLKIT AND FRAMEWORK 25

6. CONCLUSION AND POLICY RECOMMENDATIONS 28

REFERENCES 30