AI READINESS, FISCAL DISCIPLINE, AND THE CURRENT ACCOUNT: EVIDENCE FROM A CROSS-COUNTRY ANALYSIS

Abstract

In recent years, artificial intelligence (AI) has started becoming an increasingly important determinant of economic structures, patterns of productivity, and competitiveness at an international level. However, the implications of AI in terms of the performance of the external sectors, especially current account balances, have not been sufficiently explored yet. The paper attempts to investigate if there is a connection between the level of AI readiness and the improvement in current account performance in European countries using the effect of AI preparedness in comparison to conventional macroeconomic determinants. Using a cross sectional dataset including European countries in 2023, the paper employs linear regression to examine the effect of AI preparedness, government revenue, and government net lending on the current account balance. As the empirical findings show, the total regression model is statistically significant meaning that the chosen explanatory variables collectively account for variations in the current account balance. At the same time, out of all the selected factors, only government net lending shows a statistically significant effect on the current account balance as being positively correlated with it. In addition, AI preparedness has a negative effect on the current account balance but statistically insignificantly meaning that high AI readiness does not necessarily improve external balance in the short term. Finally, government revenue does not show any significant effect on the current account performance either. The results imply that, although AI readiness may be considered an important structural determinant in the long run, the macroeconomic effects of AI on external balance may be contingent upon certain additional factors like productivity, ability to export, innovation environment, and institutions.