The interplay of long-term interest rates in the link of AI investment and financial institutions development

Purpose Currently, the crucial role of artificial intelligence (AI) in the field of finance has been demonstrated through prior studies which have been focused on the study of fintech and its consequences on the financial system. Following the same research line, the purpose of this paper is to unveil the effect of AI private investment on financial institutions’ development alongside with the moderating role of interest rates in this relationship. Design/methodology/approach The data set analyzed refers to 24 countries, in the period between 2014 and 2021. The methodology, based on dynamic panel data, uses the difference-GMM estimator in two steps to ensure the robustness of the estimates. Findings The findings show a negative relationship between AI private investment and financial institution index, whilst the effect of long-term interest rates appears to be a moderator of the relationship since the negative impact of AI investment on financial institutions disappears when considering the moderator. The findings of this study question the effectiveness of AI investments in the development of financial institutions because of potential risks in their application. Research limitations/implications For further research, this paper opens another line of investigation regarding the crucial role of interest rates in financial development, which is paramount for policymakers, since it gives another view about the effect of financial risks and monetary policies on investments in AI. Originality/value Moreover, this paper expands recent literature on the topic of financial development and new technologies, by using long-term interest rates as a moderating factor in this relationship.