Algorithmic Intermediation and the International Transmission of U.S. Monetary Policy

2026-07-16

AI Summary

This study investigates how algorithm-driven funds amplify the spillover effects of U.S. monetary policy shocks on cross-border capital flows to emerging markets through algorithmic convergence. By developing a two-region macro-financial model and employing panel data analysis on high-frequency equity fund flows from 19 emerging markets over 2000–2024—combined with an identification strategy for monetary policy shocks—the paper finds that, specifically under high-volatility conditions, the high similarity of algorithmic models (rather than trading speed per se) significantly exacerbates capital outflows, generating an “algorithmic herding” effect. The results highlight algorithmic convergence as a key transmission and amplification mechanism, suggesting that enhancing model diversity could effectively mitigate systemic risk and offering a novel policy perspective for safeguarding cross-border financial stability.

Abstract

This paper examines how algorithmic and AI-driven fund management shapes the international transmission of U.S. monetary policy to emerging markets. It argues that the key source of instability is not algorithmic intermediation itself, but the similarity of models across funds. When algorithms rely on similar signals and make correlated errors, their trades reinforce one another and intensify capital-flow responses during periods of stress. When models are diverse, errors offset each other and algorithmic investors can stabilize flows. The paper develops a two-region macro-financial framework and tests its central prediction using equity portfolio flows to nineteen emerging markets from 2000 to 2024. The evidence shows that algorithmic herding amplifies outflows after U.S. monetary shocks only in high-volatility regimes, while faster adjustment alone has no comparable effect. The results imply that policy should focus on preserving model diversity rather than limiting the size of non-bank intermediation.

Problem

• algorithmic intermediation
• monetary policy transmission
• model homogeneity
• emerging markets
• capital flows

Innovation

• algorithmic herding
• model diversity
• monetary policy transmission
• emerging markets
• AI-driven asset management