International Review of Financial Analysis 74 (2021) 101705

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International Review of Financial Analysis

journal homepage: www.elsevier.com/locate/irfa

The impact of COVID-19 pandemic on transmission of monetary policy to

financial markets
Xiaoyun Wei a, Liyan Han b,*
a
Department of Financial Mathematics, School of Statistics, Capital University of Economics and Business, 121 Zhangjialukou, Huaxiang, Fengtai District, Beijing
100070, P.R.China
b
Department of Finance, School of Economics and Management, Beihang University, No. 37 Haidian District, Xueyuan Road, Beijing 100083, P.R.China

A R T I C L E I N F O
A B S T R A C T
Keywords:
COVID-19 pandemic This study uses event-study methodology to estimate the impact of the COVID-19 pandemic on the transmission
Conventional monetary policy of monetary policy to financial markets, based on a sample of 37 countries with severe pandemics. Financial
Unconventional monetary policy markets include government bond, stock, exchange rate and credit default swap markets. The results suggest that
Financial market the emergence of pandemic has weakened the transmission of monetary policy to financial markets to a more
Policy rates
significant degree. During our sample period following the outbreak of pandemic, neither conventional nor
unconventional monetary policies have significant effects on all four of the financial markets. Of course, the
unconventional monetary policies are slightly more effective as they can affect the stock and exchange rate
markets to some extent. Therefore, in the post-pandemic period, if the monetary policy is used to stimulate
financial markets, stronger policy adjustments, or other macro policies such as fiscal policies, may be needed to
achieve the desired effect

1. Introduction
before economic activities. For this reason, it is necessary to explore
In 2020, all economies around the world suffered from the unex- the effects of monetary policy on financial markets to assess the
pected “coronavirus disease 2019” (COVID-19). The damage of the monetary policy effect on economy in advance. However, through
COVID-19 pandemic to people and economy has already exceeded 2020, almost all industries suffered suddenly severe losses during the
what the global financial crisis of 2008 did, which is regarded as the COVID-19 pandemic period, and it was hard for investors to find a safe
“Great Compression” (Harvey, 2020). Its spread has created great haven. Consequently, most investors did lose their directions for
systematic risk (Sharif, Aloui, & Yarovaya, 2020), making it difficult for investment (Ozili & Arun, 2020), which could make the transmission
investors to find a safe haven. In response, almost all major economies of monetary policy to financial markets weaken as the usual pattern.
have adjusted their monetary policies by lowering policy rates (e.g., But, in reality, looking through major economies in 2020 pandemic,
Argentina, Australia, Brazil, Canada, Chile, India, Mexico, United can the monetary policy be effectively transmitted to financial
Kingdom), introducing new targeted long-term refinancing operations markets? Will the emer- gence and increasing severity of the pandemic
(Eurozone), implementing unlimited and open-ended quantitative strengthen or weaken this transmission? Are the results different for the
easing (United States), or reducing the reserve requirement ratio (e.g., different types of mone- tary policies?
Brazil, China) to provide monetary stimuli for their damaged In order to shed light on the above questions, this paper aims to
explore the impact of the COVID-19 pandemic on the transmission of
economies (Ozili & Arun, 2020). For this destructive pandemic lasting
monetary policy to financial markets. We seek to assess the impact of
more than one year and the frequent adjustments of monetary policy,
both the emergence and the severity of the pandemic. And we
it provides a unique scenario occasion for us to survey the effectiveness
especially focus on comparison between the conventional and
of monetary policy transmission.
As a general understanding, financial markets are often called the unconventional monetary policies, implementing survey
“barometer” of the national economy and react to monetary policy first comprehensively on financial markets covering the stock, the bond, the
exchange rate and the CDS markets, making the conclusions more
reliable. As policy rates usually

* Corresponding author at: Department of Finance, School of Economics and Management, Beihang University, No. 37 Haidian District, Xueyuan Road, Beijing
100083, PR China.
E-mail addresses: weiXiaoyun@cueb.edu.cn (X. Wei), hanly@buaa.edu.cn (L. Han).

https://doi.org/10.1016/j.irfa.2021.101705
Received 21 June 2020; Received in revised form 25 January 2021; Accepted 28 January 2021
Available online 6 February 2021
1057-5219/© 2021 Published by Elsevier Inc.
 X. Wei and L. International Review of Financial Analysis 74 (2021)

remain unchanged in many countries for a long time, the data on

policy rate changes contain several zero values. Therefore, we use the Post the COVID-19 pandemic, several finance and economics re-
event- study method, consistent with a rich body of recent literature searchers responded quickly to the urgent need to assess the impact of
(Chor- tareas & Noikokyris, 2017; Kuttner, 2001; Sun, 2020). The the pandemic on financial markets. For example, Yarovaya, Brzeszc-
event- analysis method makes it possible to test the transmission of zynski, Goodell, Lucey, and Lau (2020) summarize the information
monetary policy adjustments to financial markets separately, reducing transmission mechanism of the pandemic to financial markets, helping
interfer- ence from other information. scholars conduct further studies on the impact of the pandemic on
The analysis in this study proceeds via three steps. First, we start by financial markets. Goodell (2020) provides a comprehensive agenda
exploring the immediate effects of monetary policy on daily financial for future research on the COVID-19 pandemic and finance. Some
market indicators in Section 3.1 as a benchmark model. The results show empirical evidence of the impact of the pandemic on financial markets
that, for the full sample period, conventional monetary policy has sig- has also emerged. Using a sample of Nigeria’s major stock market
nificant effects on all four financial market indicators considered in indices, Ozili and Arun (2020) has shown that the pandemic caused
this study, including changes in 10-year government bond yields, stock the stock market indices to plunge, as investors moved their money to
index returns, changes in exchange rates, and growth rates in CDS safer assets, such as government bonds. Corbet, Larkin, & Lucey (2020),
spreads. However, during the pandemic period, conventional based on a sample of gold and crypto-currencies, find the evidence of a
monetary policy has no significant effect on any of indicators. “flight to safety” during the COVID-19 pandemic period. Further, Sharif
Unconventional monetary policies have effects only on stock index et al. (2020) have studied the relationship between the pandemic, oil
returns and changes in exchange rates to some extent. In other words, prices, the stock market, geopolitical risk, and economic policy
neither conventional nor unconventional monetary policies have uncertainty in the United States. The results show that the pandemic
significant effects on all four of financial market indicators. These has a stronger effect on geopolitical instability than on the economic
results can be regarded as a pri- mary indication that monetary policy instability of the United States. Ashraf (2020) finds that the
has been less effective since the coronavirus outbreak. Of course, increase in confirmed cases of COVID-19 has negatively affected
unconventional monetary policies are slightly more effective than stock markets in 64 countries. Izzel- din, Muradoglu, Pappas, &
conventional policy during the pandemic period. Sivaprasad (2021) examine the impact of COVID-19 on stock markets
Second, in Section 3.2, the benchmark model is extended to assess in G7 countries and show that almost all business sectors have suffered
the impact of the emergence and severity of the pandemic. We from crisis during COVID-19 pandemic period, particularly the U.S.
introduce the interaction terms of monetary policy and pandemic and the U.K.
variables to exploit and compare the influence of heterogeneous The studies most relevant to this study are those that estimate the
monetary policy coefficients on financial markets, on both pandemic effects of monetary policy on financial markets during the COVID-19
and non-pandemic days. The results show that the emergence of pandemic period. For example, Ozili and Arun (2020) find that policy
pandemic has weakened the transmission of monetary policy to rates had a significant negative impact on stock index prices during the
financial markets to a more significant degree, while its severity has pandemic period, based on data from leading stock markets in North
weakened the transmission only partially. America, Africa, Asia, and Europe between March 23 and April 23,
Finally, we investigate whether these results are robust across sam- 2020. Yilmazkuday (2020) investigates the effects of U.S. monetary
ple countries that share similar economic or financial circumstances. policy (policy rates) on exchange rates during the pandemic period in
Specifically, we examine the impact of circumstance variables, 21 emerging-market countries. The results show that a negative U.S.
including a country’s degree of trade openness, level of financial monetary policy shock led to currency depreciation in emerging mar-
development, level of industrialization and fiscal policy. The results kets. Bhar & Malliaris (2020) find the Fed’s unconventional monetary
show that the weakening impact of pandemic emergence on monetary policies, implemented after 2008 financial crisis, could help reduce
policy trans- mission is robust, even with circumstance variables are longer-term interest rates and point out their results could provide les-
considered. Furthermore, the higher the degree of trade openness, the sons for the central bank to calm financial and economic impacts of the
lower the weakening effect of the pandemic on the transmission of COVID-19. However, they do not empirically test the effects of uncon-
monetary policy to 10-year government bond yields. In addition, fiscal ventional monetary policies during the COVID-19 pandemic period. In
policies implemented during the pandemic have some effects on summary, some of the above studies are on the single country or single
financial mar- kets to some extent. However, the severity of pandemic financial market, some are based solely on the data during the COVID-19
has only partially weakened the transmission of monetary policy, and pandemic period, and the others only discuss a single monetary policy.
the results are insufficiently robust. Given that the COVID-19 pandemic has spread to almost all countries,
Our study builds on two types of literature: research on the trans- a general study involving a wider range of sample is needed.
mission of monetary policy to financial markets; and research on the This paper extends the existing literature on three main
impact of the COVID-19 pandemic on financial markets or the trans- dimensions. First, this study explores the impact of the COVID-19
mission of monetary policy to financial markets. pandemic on the effects of monetary policy transmission to financial
There is a rich body of literature on the transmission of monetary markets from an international perspective, helping to assess the
policy to financial markets, based on event-study methodology. Most impact of the pandemic worldwide. Second, we discuss not only the
studies have investigated the transmission of monetary policy to single impact of the emergence of the pandemic on the effects of conventional
financial market indicators, such as government bond yields (Kuttner, and unconventional policy transmission, but also the impact of the
2001; Sun, 2020), stock index returns (Bayraci, Demiralay, & Gencer, severity of the pandemic, analyzing the impact of pandemic more
2018; Ferrer, Bolo´s, & Benítez, 2016), exchange rates (Bouakez & comprehensively. Finally, the results provide a better understanding of
Nor- mandin, 2010; Inoue & Rossi, 2019), and CDS spreads (Alexander the changes in the effects of monetary policy transmission to financial
& Kaeck, 2008; Chung & Chan, 2010; Eser & Schwaab, 2016; markets in response to the outbreak of pandemic and a more specific
Hammoudeh & Sari, 2011; Hull, Predescu, & White, 2004). Other consideration for future monetary policy adjustments in the post-
research has investigated the transmission of monetary policy to pandemic period.
multiple financial market indicators, instead of a single indicator. For The rest of the paper is organized as follows. Section 2 outlines the
example, Claus, Claus, and Krippner (2018) estimate the effects of both data and their sources. Section 3.1 sets up the benchmark event-study
conventional and unconventional monetary policy shocks on 10-year models to assess the transmission of monetary policy to financial mar-
government bond yields, corporate bond rates, gold fiXing prices, the kets. Section 3.2 investigates the impact of the COVID-19 pandemic on
stock price index, the real estate market index, and exchange rates in the transmission. Section 3.3 considers the influence of the economic
the United States. or financial circumstance on the robustness of results. Section 4

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 X. Wei and L. International Review of Financial Analysis 74 (2021)
concludes the paper.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

2. Data
industrialization are sourced from the World Bank Database. Fiscal
This study draws on the panel data for 37 countries between policy data are collected by the authors from the website of
January 1, 2011 and April 30, 2020. The sample countries are selected governments and the reports of fiscal policies. The U.S. exchange rate
based on the severity of the pandemic and the importance of their is represented by the U.S. dollar index, while other exchange rates are
position in the world economy. Of the countries in our sample, 34 have calculated using spot rates for each country’s currency against the
severe COVID- 19 pandemics (more than 10,000 confirmed cases as of dollar. The daily
April 30, 2020). Three G20 countries, Argentina, Australia, and South number of confirmed cases of COVID-19 is sourced from data collected
Africa, are not included among these 34 countries. Given the by Johns Hopkins University.2
importance of the G20 countries and their influence on the world
economy, we include these three countries in our sample. Their 3. Empirical results
confirmed cases, as of April 30, 2020, were 4428, 6766, and 5647,
respectively. Precisely, we consider the following countries: Argentina, 3.1. The transmission of monetary policy to financial markets
Australia, Austria, Belgium, Brazil, Canada, Chile, China, France,
Germany, India, Indonesia, Ireland, Israel, Italy, Japan, Mexico, We seek to identify the impact of the COVID-19 pandemic on the
Netherlands, Pakistan, Peru, Poland, Portugal, Qatar, Romania, transmission of monetary policy to financial markets. As a starting point,
Russia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, this analysis estimates the effects of monetary policy on financial market
Sweden, Switzerland, Turkey, Ukraine, United Arab Emirates, United indicators. It draws on the broadest range of literature (Alexander &
Kingdom and United States. The number of confirmed cases in 37 Kaeck, 2008; Chortareas & Noikokyris, 2017; Kuttner, 2001; Sun, 2020)
sample countries is shown in Fig. 1. to regress the changes in financial markets on policy rate changes
We seek to assess the impact of both the emergence and the (conventional monetary policy) and the unconventional monetary pol-
severity of the COVID-19 pandemic. Thus there are two key icy announcement variable.
independent vari- yi t = c + α1ri t + εi t (1)
, , ,
ables in the experiment. One measures whether the COVID-19 pandemic
has occurred and is denoted by a 0–1 dummy variable. The other mea-
sures the severity of the pandemic, which is defined as the ratio of yi,t = c + β1 ri,t + β2 ui,t + εi,t (2)
confirmed cases to aggregate population in a country.
where yi, t can represents daily changes in country i’s 10-year govern-
For monetary policy, the policy rate changes are taken as the con-
ment bond yields (GOV), the daily (log) returns of stock market price
ventional monetary policy variable. And a dummy variable, developed
indices (STO), changes in exchange rates (EXC) and the growth rates
by the announcements of the unconventional monetary policies, is taken
of CDS spreads (CDS) on the day when monetary policy changed3; ri, t
as unconventional monetary policy variable. The dummy variable takes
can
the value of 1 on days of unconventional monetary policy announce-
denote policy rate changes that stand for adjustments of conventional
ments and zero otherwise. Unconventional monetary policies include
monetary policy. ui, t is a dummy variable that takes the value of 1 on
the announcements of quantitative easing, large-scale purchases of long-
days with unconventional monetary policy announcements and zero
term assets, targeted reduction in reserve requirement ratio, and so on,
otherwise. In model (1), t refers to the full sample period—from
during the COVID-19 pandemic period. The investigation of conven-
January 1, 2011 to April 30, 2020. However, in model (2), t refers
tional monetary policy is based on the full sample period—January 1,
only to the
2011 to April 30, 2020, while the investigation of unconventional
COVID-19 pandemic period—from January 22 to April 30, 2020.
monetary policies considers the pandemic period—January 22, 2020
Following the existing literature (e.g., Chortareas & Noikokyris,
to April 30, 2020,1 when the monetary policy changes most frequently 2017), we estimate models (1) and (2) based on the least square
after the coronavirus outbreak.
method. The estimated results for models (1) and (2) are reported in
Among the daily financial market indicators, we choose represen-
Tables 2 and 3, respectively.
tative indicators that respond freely to changes in monetary policy and
The coefficient estimates α1, capturing the responses of financial
may be influenced by monetary policy. To test the transmission of
markets to changes in policy rates, are statistically significant in all
monetary policy to yield curves, we include 10-year zero-coupon gov-
Eqs. [1]–[4] in Table 1. Specifically, the coefficient of changes in 10-
ernment bond yields. To estimate the transmission of monetary policy to
year government bond yields (Eq. [1] in Table 1) on policy rate
equity markets, we include stock index returns. The data also include
changes has the expected positive sign, suggesting that the
changes to each country’s currency exchange rate against the dollar to
transmission of con- ventional monetary policy along the yield curves
estimate the transmission of monetary policy to exchange rate markets
is relatively smooth, in line with the results of most studies. For
(Claus et al., 2018). Finally, we include the growth rates of credit
example, Kuttner (2001) esti- mates the responses of bond yields to the
default swap (CDS) spreads to represent the credit market. A CDS seller
changes in target Federal funds rate and finds that the unanticipated
provides credit protection against the risk of default for CDS buyers. In
changes in target rate have more significant positive effect on the bond
return, CDS buyers pay periodic fees to sellers, and these are called CDS
yields than the anticipated changes. Sun (2020) finds that the
spreads. CDS spreads are, therefore, used as a direct measure of credit
government bond yields are posi- tively correlated with the benchmark
risk in economies and financial markets (Alexander & Kaeck, 2008).
lending rate in China. Compared to the above studies, our result covers
The daily policy rate data are sourced from DataStream, while data
a wider sample of countries and the result is more general. The first
related to unconventional monetary policy announcements are collected
sub-graph of Fig. 2 also displays the positive relationship between the
manually by the authors from the central bank websites and the
changes in policy rates and 10-year government bond yields.
various monetary policy reports for each country. The detailed data
The response of stock index returns (Eq. [2] in Table 1) to policy
concerning the unconventional monetary policy announcements are
rate changes is positive and significant. This result appears to
shown in
contradict the empirical theory that when the policy rates rise, the
bond yields rise and
the stock index returns will fall. But it’s consistent with a lot of recent
Table A1 in AppendiX. All daily data about dependent variables, research that the rise in bond yields or interest rates is accompanied by
including 10-year government bond yields, stock index returns, ex-
change rates, and 10-year CDS spreads, are sourced from DataStream.
1
The annual data for trade openness, financial development, and In practice, the COVID-19 pandemic began before January 22, 2020, but

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 X. Wei and L. International Review of Financial Analysis 74 (2021)
these are the earliest data available on the number of confirmed cases.

2
See the webpage:https://www.arcgis.com/apps/opsdashboard/index.
html#/bda7594740fd40299423467b48e9ecf6
3
A non-zero change in the policy rates is considered a change of conventional
monetary policy, while an announcement of unconventional monetary policy is
considered a change of unconventional monetary policy.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

1200000

1000000

800000

600000

400000

200000

Fig. 1. Confirmed cases in 37 countries, as of April 30, 2020.

Table 1 investment returns decline in the short term. For another example, when

Effects of monetary policy on financial markets: full sample period. the central bank reduces policy rates, investors view the economic
Dependent variables [1] [2] [3] [4] prospects as gloomy and reduce their stock holdings. Thus, lowering
GOV STO EXC CDS
interest rates can make stock returns decline. A typical case occurred
on March 3, 2020, when the Federal Reserve announced that the
ri, 0.454*** 0.030*** —0.025*** 0.072***
t
standard range of the federal funds rate would be lowered by 50 basis
(58.202) (10.456) (—24.477) (41.153)
c 0.010 —0.001 0.001 0.005 points to deal with the economic impact of the COVID-19 pandemic.
Market in- vestors sold off the stocks on that day, and the S&P 500
index fell by

Observations (1.496) (—0.320) (0.964) (0.242) more than 2.81% in a day. The VIX fear index rose by 12.54%, showing
R2 4868 4895 4895 4893
that monetary policy will affect the stock market by influencing the
Number of countries 0.412 0.022 0.110 0.257
37 37 37 37 views of market participants in relation to economic prospects. The
yields. However, some studies verify the possible positive relationship between
Notes: This table reports the benchmark results from the regressions of the interest rates and stock returns, using the economic prospects hypothesis to
model (1), that is, the effects of the changes in policy rates (ri, t) on the changes in explain this (Shahzad, Ferrer, Ballester, & Umar, 2017).
10-year government bond yields (GOV), stock index returns (STO), changes
in exchange rates (EXC) and growth rates of CDS spreads (CDS). The estimation
is based on the full sample period. The coefficient estimates are obtained by
the OLS method. t-statistics are reported in parentheses and ***/ **/* denote
the significance at 99%, 95% and 90% confidence levels, respectively.

an increase in stock index returns. 4 For example, Ferrer et al. (2016) find
that 10-year government bond yields (the pro Xy of interest rates) and
stock returns move in the same direction in European countries,
despite it varies over time and across time horizons. Bayraci et al.
(2018) have observed the co-movement between the 10-year Treasury
yields and stock returns based on a sample of G7 countries. In our
case, the coef- ficient of interest rates is 0.030, meaning that the stocks
index returns and interest rates move also in the same direction. This
positive sign may reflect the fact that policy rates (or market interest
rates) and stock indices follow the same macroeconomic indicators,
such as inflationary expectations and economic prospects (Ferrer et al.,
2016). For example, a fall in the policy rates means an expansionary
monetary policy, and investors expect inflation. Inflation expectations
lead investors to expect higher raw material prices, which can lead to
higher financing costs and lower corporate profits. Consequently,
corporate valuations fall and

4
Early studies provided evidence that the increase in policy rates negatively
affected stock returns (e.g., Korkeam¨aki, 2011). They explain this result
using the cash-flow hypothesis, which assumes that when interest rates rise,
money flows from the stock market into the bond market in pursuit of higher

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 X. Wei and L. International Review of Financial Analysis 74 (2021)
second sub-graph of Fig. 2 shows the positive relationship between
policy rate changes and stock index returns.
The exchange rate and policy rate changes are significantly nega-
tively correlated (see also the third sub-graph of Fig. 2). This means
that a contractionary monetary policy (an increase in policy rates) will
lead to a depreciation of exchange rates. Many studies have reached
the similar result. For example, Hellwig, Mukherji, and Tsyvinski
(2006) develop a model of currency crises and conclude that an
increase in domestic interest rates may cause a depreciation of the
domestic cur- rency. Bouakez and Normandin (2010) find that the
nominal exchange rates in G7 countries depreciate within roughly
then months in response to the expansionary U.S. monetary policy
shocks. There are two possible reasons for this result. On the one
hand, an increase in policy rates re- duces demand for borrowing in
the domestic currency and leads to a capital outflow, which causes
domestic currency depreciation (Hellwig et al., 2006). On the other
hand, an increase in policy rates reflects the increase in the expected
inflation rate, which further causes the demand for domestic currency
to fall (Frankel, 1979). Therefore, when policy rates increase, the local
currency exchange rate depreciates.
The policy rates have significant positive effect on CDS spreads
(see also the fourth sub-graph of Fig. 2). On the one hand, higher CDS
spreads mean higher credit risk in the market. Therefore, the positive
effect of monetary policy on CDS spreads can indicate that investors
are worried about the adverse selection and moral hazard caused by
higher interest rates. Therefore, an increase in policy rates can cause
CDS spreads to rise. On the other hand, an increase in policy rates can
cause a booming economy to depress. The bond issuers’ repayment
burden increases rapidly and creates a risk of default. Then the
demand for protecting against risk increases, and the CDS spreads
rise.
In summary, as Table 1 shows, changes in conventional monetary
policy (policy rates) can transmit significantly to the four financial
markets in our sample. This suggests that governments need to
consider

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

15 4

3
10

-5

-1

-10

Stock-index returns (%)

-2
Changes in 10-year government bond yields (%)

-15

-3

-20

-4

-25
-5

-30 -6

-40 -30 -20 -10 0 10 20 -40 -30 -20 -10 0 10 20

Changes in policy rates (%) Changes in policy rates (%)

4000

1.5

2000

0.5

-2000

0 -4000
Changes in exchange rates (%)

-6000
Growth rates of CDS spreads

-0.5

-8000

-1
(%)

-10000

-1.5

-40 -30 -20 -10 0 10 20 -12000

-40 -30 -20 -10 0 10 20

Changes in policy rates (%)

Changes in policy rates
(%)

Fig. 2. Policy rate changes and changes in financial market indicators.

these significant effects of monetary policy on financial markets when

adjusting monetary policy in response to economic targets, such as monetary policy to financial markets during the pandemic period. The
output and inflation or when the monetary policy is used to stimulate the effects of the policy rates on all of four financial indicators are not sig-
financial markets. nificant. This is a preliminary indication that the pandemic has weak-
Table 2 presents the estimation results for the transmission of ened the transmission of conventional monetary policy to financial
markets.
In the case of unconventional monetary policies, the policy has sig-
Table 2 nificant negative effects on stock index returns and exchange rates (as
Effects of monetary policy on financial markets: COVID-19 pandemic period. shown in Eqs. [2] and [3] in Table 2) but no significant effects on
government bond yields or CDS spreads. As we know, both
[1] [2] [3] [4]
conventional and unconventional monetary policies are primarily
Dependent variables GOV STO EXC CDS expansionary dur- ing the pandemic period. The negative coefficients
ri, t 0.021 —0.003 —0.000 0.006 above indicate that expansionary unconventional monetary policies
make stock index
returns and exchange rate changes fall. The effect of unconventional
(0.609) (—0.845) (—0.130) (0.818) monetary policies on stock index returns is similar to that of conven-
u i, t 0.055 —0.033*** —0.007*** 0.011
(0.677) (—2.790) (—3.335) (0.657) tional monetary policy in Table 1. Perhaps the expansionary uncon-
c —0.043 —0.001 0.000 0.008 ventional monetary policies make market participants more
pessimistic

R2 (—1.123) (—0.323) (0.000) (0.909) about the economy, thus causing the stock index returns decline.
0.0210 0.0613 0.0781 0.0512
Obs. The effect of unconventional monetary policies on exchange rates is
Number of countries 136 136 136 136
24 24 24 24 different from that of conventional monetary policy in Table 1. An
The coefficient estimates are obtained by the OLS method. t-statistics are re-
Notes: This table reports the benchmark results from the regressions of the ported in parentheses and ***/ **/* denote the significance at 99%, 95% and 90%
model (2), that is, the effects of changes in policy rates (ri, t) and unconventional confidence levels, respectively.
monetary policy announcements (ui, t) on the changes in 10-year government
bond yields (GOV), stock index returns (STO), changes in exchange rates (EXC)
and the growth rates of CDS spreads (CDS). The estimation is based on the
sample of COVID-19 pandemic period, i.e., January 22, 2020 - April 30, 2020.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)
expansionary unconventional monetary policy leads to a depreciation
of the local currency, consistent with the results obtained by Inoue
and Rossi (2019). Of course, Inoue and Rossi (2019) focus only on the
effects of U.S. monetary policy on the U.S. dollar exchange rate during
the unconventional monetary policy period and don’t distinguish
between the conventional and the unconventional monetary policies.
We examine the effects of the announcements of unconventional
monetary policies on the exchange rates separately and obtain a
coefficient of

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

0.007. The reason for this negative relationship may be that uncon-
—
ventional monetary policies affect exchange rates by influencing the Table 3
current account. When the central bank announces an unconventional Impact of the emergence of COVID-19 pandemic on the transmission of mone-
monetary policy, credit is loosened, loans increase, and investment and tary policy to financial markets: full sample period.
consumption rise. Subsequently, the demand for imports increases, [1] [2] [3] [4]
causing household demand for foreign currencies to rise and the local Dependent variables GOV STO EXC CDS
currency to depreciate.
ri, 0.462*** 0.031*** —0.026*** 0.073***
In short, we can conclude from Table 2 that neither conventional t

(58.941) (10.564) (—24.709) (41.725)

nor unconventional monetary policies have significant effects on all dumi, t —0.011 0.004 —0.003 0.010
four (—0.252) (0.238) (—0.562) (1.032)
financial market indicators during the COVID-19 pandemic period. dumi, t × ri, t —0.414*** —0.030 0.023*** —0.070***
This
further demonstrates that the pandemic has weakened the (—6.803) (—1.301) (2.781) (—5.125)
transmission of monetary policy to financial markets. Of course, the c 0.007 —0.001 0.001 0.002
effects of un- conventional monetary policies on financial markets are (1.026) (—0.455) (1.260) (0.100)
Obs. 4868 4895 4895 4893
slightly more
significant than those of conventional monetary policy. changes, and the growth rates of CDS spreads. Although the coefficient
of the interaction term dumi, t × ri, t on stock index returns is not sig-
nificant enough, it is negative, and the t-statistic value is —1.301, which

5
3.2. The role of the COVID-19 pandemic If a variable itself has no significant effect on the dependent variable, it is
meaningless to study the interaction or moderating effect of other variables with
this variable on the dependent variable.
To identify the impact of the COVID-19 pandemic on the trans-
mission of monetary policy to financial markets, we include variables
of the emergence and severity of the pandemic in this section. We
estimate the following two models.
yi,t = c + α1 ri,t + α2 dumi,t + α3 dumi,t × ri,t + εi,t (3)

yi,t = c + β1 ri,t + β2 ui,t + β3 si,t + β4 si,t × ri,t + β5 si,t × ui,t + εi,t (4)

where dumit is a 0–1 dummy variable taking the value of 1 during the
pandemic period and zero otherwise. si, t denotes the severity of
pandemic in country i on day t during the pandemic period, defined as
the daily growth rate of confirmed cases. The interaction term dumi, t ×
ri, t represents the impact of the emergence of pandemic on the effects
of
policy rates on financial markets. si, ×t ri, t and si, t ui, t represent the
impact of the severity of pandemic on the effects of policy rates and
unconventional monetary policies on financial markets, respectively.
Similarly, t refers to the full sample period in model (3). In model (4), t
refers only to the COVID-19 pandemic period.
As Table 2 clarifies, policy rates have no significant effect on any of
the four financial market indicators, while unconventional monetary
policies have significant effects only on stock index returns and ex-
change rates during the COVID-19 pandemic period. For this reason,
we examine the impact of the pandemic’s severity on these two effects
only. In other words, when model (4) is estimated, × si, t ui, t is
introduced into
the equation, where the dependent variables are stock index returns
and exchange rate changes.5 However, in the four estimation equations
in Table 1, the effects of policy rates on all four dependent variables
are
significant. Therefore, we include all four financial market indicators
as dependent variables when estimating model (3) in this section.
Table 3 shows the impact of the emergence of pandemic on the
transmission of monetary policy to financial markets. The effects of the
policy rates on the four dependent variables are consistent with those
in Table 1; they are all still significant and consistent with the signs of
the response coefficients in Table 1. This confirms that, to some extent,
the effects of policy rates on the four financial market indicators are
robust.
The coefficient α3 of dumi, t × ri, t is the main focus of this section.
Table 3 shows that α3 in Eqs. [1], [3] and [4] are significant, with signs
that are the reverse of the policy rate coefficients. This indicates that
the emergence of COVID-19 pandemic has weakened the effects of
policy rate changes on 10-year government bond yields, exchange rate

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 X.2Wei and L. International Review of Financial Analysis 74 (2021)
R 0.419 0.022 0.112 0.262
Number of countries 37 37 37 37

Notes: This table reports the results from the regressions of the model (3), that is,
the effects of changes in policy rates (ri, t), the emergence of COVID-19 (dumi,
t) and their interaction terms (dumi, t × ri, t) on the four financial market

indicators. The estimation is based on the full sample period. The coefficient
estimates are
obtained by the OLS method. t-statistics are reported in parentheses and ***/
**/* denote the significance at 99%, 95% and 90% confidence levels,
respectively.

is close to significant (Eq. [3] in Table 3). This indicates that the
pandemic has weakened the effect of policy rates on stock index
returns to some extent.
Combining the estimates of the four equations in Table 3, we
conclude that the emergence of COVID-19 pandemic has weakened
the transmission of conventional monetary policy to financial markets
to a significant degree. The reasons for this weakening effect will be
explained later. Of course, the results in Yilmazkuday (2020) suggest
that, during the COVID-19 pandemic period, the negative shock on
the
U.S. policy rates still leads to spillover currency depreciation of 10
advanced and 21 emerging economies, which appears inconsistent
with our results. However, they are essentially not contradictory. Due
to the important position of the dollar, the U.S. monetary policy will
naturally cause the fluctuations of exchange rates against the U.S.
dollar in many countries. Instead, we explore the impact of the
pandemic on the transmission of a country’s own monetary policy to its
financial markets. Without examining the data, Ozili and Arun (2020)
put forward a view that, during the COVID-19 pandemic period,
monetary policy may help to calm financial markets but it can’t cure
the economic recession. In practice, our empirical results suggest that
monetary policy becomes less effective even in regulating financial
markets during the COVID-19 period. Therefore, our results confirm
the view in Ozili and Arun (2020) to some extent and provide more
convincing evidence for the effectiveness of monetary policy
transmission to financial markets dur- ing the pandemic period.
Table 4 lists the impact of the severity of pandemic on the
trans- mission of monetary policy to financial markets. The
coefficients β5 of si,
t × ui, t in Eqs. [1] and [2] in Table 4 are the main focus of this section.
The coefficient of interaction term si, t × ui, t in Eq. [1] in Table 4 is
almost significant, and its sign is the reverse of the coefficient of ui, t,
indicating that the increased severity of the COVID-19 pandemic has
partially weakened the transmission of unconventional monetary pol-
icies to stock index returns. The coefficient of si, t × ui, t in Eq. [2] in
Table 4 is significant, and its sign is the reverse of the coefficient of ui,
t,

meaning that the increased severity of the pandemic has weakened

the transmission of unconventional monetary policies to exchange
rates.
Table 2 shows that monetary policy has no significant effects on all
financial market indicators during the COVID-19 pandemic. However,
as Table 4 shows, as long as there is an effect, that effect will weaken
or remain largely the same, as the pandemic becomes more severe.
This suggests that an increase in the severity of COVID-19 pandemic
hasn’t significantly affected the effectiveness of the monetary policy
trans- mission to financial markets.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

Table 4 industrialization and fiscal policy.6 In particular, we investigate

Impact of the severity of COVID-19 pandemic on the transmission of monetary whether domestic economic circumstances can explain why the
policy to financial markets: COVID-19 pandemic period. impact of the pandemic on the transmission of monetary policy has
Dependent variables [1] [2] been reduced (or increased) in countries with similar domestic
economic circumstances. Following Ma and Lin (2016), we use the
STO EXC
ratio of domestic credit to GDP as the measure of financial
ri, t —0.017** —0.001 development. The ratio of trade (export import) to GDP is used to
(—2.022) (—0.495)
ui, t 0.005 0.004 + measure the degree of trade openness (Chortareas & Noikokyris,
(0.187) (0.847) 2017). The ratio of industrial added value to GDP measures the level of
si, t —0.004 0.001 industrialization. The ratio of fiscal stimulus
amount during the COVID-19 pandemic period to GDP in 2019 measures
(—0.214) (0.335) the degree of fiscal policy. Specifically, following the existing literature
si, t × ui, t —0.220 —0.063**
(e.g., Chortareas & Noikokyris, 2017; Ehrmann & Fratzscher, 2009;
Ma
(—1.518) (—2.454)
c —0.006 —0.001 & Lin, 2016), we include the interaction terms of trade openness,
(—0.834) (—0.788) financial development, industrialization and fiscal policy with the
R2 0.104 0.132 interaction terms in models (3) and (4) to obtain models (5) and (6).
Obs. 111 111

Number of countries 24 24 ∑4 ∑4
yi , t = c + α1r,i t + α2dum, i t + α3dum, i t × , ri t + α X +
k k k ,
k=1 4 i,t k=1 5 α Xi t
Notes: This table reports the results from the regressions of the model (4), that
theis,effects of changes in policy rates(ri, t), unconventional monetary policy an- × dumi,t × ri,t + εi,t (5)
nouncements (u ), the severity of COVID-19 (s ) and their interaction terms (s

u and s i, t i, t i,

i, t × ri, t) on stock index returns (STO) and changes in exchange rates y i,t = c + β1 i,t + β2 i,t + β3 i,t + β4 i,t × ri,t + β5 i,t × ui,t + βk Xi,tk
t i, t
∑4 k=1 6
× r u s s s
(EXC). The estimation is based on the sample of only COVID-19 pandemic ∑4 ∑4
period, i.e., January 22, 2020 - April 30, 2020. The coefficient estimates are + βk Xi, t × s, i t × , ri t + βk ,Xi t ×, si t ×, ui t +
, εi t (6)
k=1 7 k=1 8
obtained by the OLS method. t-statistics are reported in parentheses and ***/
**/* denote the significance at 99%, 95% and 90% confidence levels, where Xk is a 0–1 dummy variable and denotes the economic circum-
respectively. i,t
stances. X1 ,X2 , X3 and X4 represent the level of trade openness,
i,t i,t i,t i,t

In summary, we can conclude from Tables 3–5 that the financial development, industrialization and fiscal policy, respectively.
transmission Xk takes the value of 1 if a country’s economic circumstance variable is
of
themonetary policy to financial market variables has wakened during i,t 1

COVID-19 period, in comparison to the non-COVID-19 period. 3.3. The role of economic circumstances
Furthermore, both the emergence and severity of the pandemic have
somewhat weakened the transmission of monetary policy. Although
policymakers set out to enhance public confidence in financial markets
and the economy during the pandemic period, these fast monetary
policy responses were insufficient.
We can explain why the COVID-19 pandemic has weakened the
transmission of monetary policy to financial markets in three ways.
First, investors did not expect the nascent, inadequate, and uncertain
monetary policies introduced during the pandemic period. This lack of
experience made market participants less responsive to monetary pol-
icies than they would have been in normal times. To a greater extent
than usual, less risk tolerant market participants stayed on the
sidelines in the short run.
Second, although the expansionary monetary policies were
designed to encourage market participants to engage in financial and
economic activities, the social distancing restrictions and lockdowns
imposed by several governments hindered financial activity (Sharif et
al., 2020). For example, the World Health Organization advises people
to stay at least one meter apart. Meetings, conferences, and dinners are
not allowed. All of these measures limit financial and economic
transactions.
Third, investors in financial markets generally react quickly to
monetary policy announcements by moving assets into safe or higher-
yielding assets. However, some studies show that most assets are rela-
tively ineffective in providing a safe haven for investors (Ji, Zhang, &
Zhao, 2020). Investors are less likely to transfer liquidity or shift to
safe assets by replacing financial assets when COVID-19 is spreading
worldwide and creating systematic risk. Therefore, they react less after
monetary policy announcements.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)
in the top half of the sample of 37 countries, and zero otherwise. Xi,t × vari- able is “stock index returns”. Instead, the dependent variables are
dumi,t × ri,t is the interaction term for the economic circumstance vari- 10- year government bond yields, changes in exchange rates, and
able. It denotes differences in the impact of the emergence of COVID- growth rates of CDS spreads.
19 The Eq. [2] in Table 4 shows that the severity of COVID-19
pandemic on the transmission of policy rates (conventional monetary pandemic only has a significant impact on the effect of policy rates on
policy) to financial markets in different economic settings. Xi, t × si, t × exchange rates. Therefore, we estimate model (6) by including
ri, t denotes differences in the impact of the severity of pandemic on equations in which exchange rates are the dependent variable.
the Moreover, in the equations with exchange rates as the dependent
transmission of policy rates to financial markets in different economic variables, the interaction term includes only Xk × si, t × ri, t.
i,t
settings. Xi, t si, t ui, t denotes differences in the impact of the severity ×
Table 5 reports the results of the estimation of model (5) with gov-
of pandemic on the transmission of unconventional monetary policies to ernment bond yields and exchange rates as dependent variables; Table 6
financial markets in different economic settings. Other variables in reports the results using CDS spreads as dependent variables. The co-
models (5) and (6) are as previously defined.
efficients of Xki, × t dumi,×t ri, t (k 1,2,3,4) are the main focus of
Here, the estimation is based on the estimation results of models
=
this section. As shown in Tables 6 and 7, apart from trade openness, the
(3) and (4). Eq. [2] in Table 3 shows that the emergence of COVID-19
other three circumstance variables have no significant effects on the
pandemic does not significantly impact the effect of policy rates on results, suggesting that the circumstance variables have little
stock index returns. Therefore, when the regression model (5) is esti- influence on the
mated, it no longer includes the equation in which the dependent

The previous section shows that the emergence and severity of the
COVID-19 pandemic have nonnegligible impact on the transmission of 6
It is worth noting that that we do not assess the impact of time series data of
monetary policy to financial markets. This section assesses whether the
fiscal policy. We view fiscal policy as a circumstance variable. It allows us to
above results are robust, when considering a country’s domestic eco- identify the impact of different fiscal circumstances on the results in Section
nomic circumstances, including trade openness, financial 3.2.
development,

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

Table 5
Role of economic circumstances: full sample period.

Dependent variables [1] [2] [3] [4] [5] [6] [7] [8]

GOV GOV GOV GOV EXC EXC EXC EXC

ri, t 0.465*** 0.465*** 0.465*** 0.465*** —0.026*** —0.026*** —0.026*** —0.026***

dum (59.416) (59.381) (59.425) (59.380) (—24.741) (—24.727) (—24.702) (—24.799)

i, t —0.010 —0.018 —0.013 —0.019 —0.004 —0.002 —0.005 —0.003
dum (—0.221) (—0.418) (—0.300) (—0.429) (—0.630) (—0.387) (—0.884) (—0.565)
i, t × ri, t —0.462*** —0.412*** —0.398*** —0.411*** 0.023** 0.022*** 0.025*** 0.023***
1 (—6.946) (—6.707) (—6.330) (—6.604) (2.568) (2.612) (2.943) (2.673)
Xi, t
—0.042 —0.059***
X1 (—0.662) (—4.263)
i, t × dumi, t × ri, t 0.241* 0.001
(1.790) (0.068)
2
X i, t 0.001 0.002

2
X × dum (0.020) (0.386)
i, t i, t × ri, t —0.049 0.034
3
Xi, t (—0.194) (0.991)
—0.052** 0.003
X3
(—2.038) (0.775)
i, t × dumi, t × ri, t —0.102 —0.026
(—0.600) (—1.114)
4
Xi, t 0.022 —0.095***
(0.291) (—3.422)
X4
i, t × dumi, t × ri, t —0.043 —0.005
(—0.227) (—0.213)
c 0.095* 0.071* 0.094*** 0.061 0.041** 0.010 0.009 0.057**
(1.912) (1.805) (2.615) (1.181) (1.962) (0.483) (0.452) (2.358)
2
R 0.427 0.427 0.426 0.426 0.0604 0.111 0.110 0.0387
Obs. 4868 4868 4868 4868 4895 4895 4895 4895
Number of countries 37 37 37 37 37 37 37 37

Notes: This table reports the results from the regressions of the model (5), that is, the effects of changes in policy rates (ri, t), the emergence of COVID-19 (dumi, t), the
circumstance variables (Xki, t, k = 1,2,3,4) and their interaction terms (dum i, t× r i, t and Xki, t × dum i, t × ri, t ) on the changes in 10-year government bond yields (GOV) and
the changes in exchange rates (EXC). The estimation is based on the full sample period. The coefficient estimates are obtained by the OLS method. t-statistics
are reported in parentheses and ***/ **/* denote the significance at 99%, 95% and 90% confidence levels, respectively.
In other words, the emergence of COVID-19 pandemic has weakened the
impact of COVID-19 pandemic on the transmission of monetary policy.
Of course, the coefficient of Xi,t1 × dumi,t × ri,t, indicating that the higher
the degree of trade openness, the lower the weakening effect of the
pandemic on the transmission of policy rates to 10-year government
bond yields. This may reflect the fact that the higher the degree of
trade openness, the more the economy and financial markets are
affected by the foreign economy, and the less they are affected by the
domestic economy. Therefore, if a country has a higher degree of trade
openness, the domestic COVID-19 pandemic will have less impact on
its overall economy, and the effect of policy rates on 10-year
government bond yields will not be significantly weakened.
In addition, it is worth noting that Eq. [8] in Table 5 and Eq. [7] in
Table 6 show that fiscal policy has negative effects on both exchange
rates and CDS spreads. In other words, the looser the fiscal policy
during the COVID-19 pandemic period, the lower the exchange rates
and the lower the CDS spreads. Because the expansionary fiscal policy
can in- crease domestic currency supply and thus increase the demand
for foreign currency, which causes the domestic currency to depreciate.
At the same time, looser fiscal policy helps to improve credit
conditions, which lead to lower CDS spreads. These results indicate
that the fiscal policies implemented during the COVID-19 pandemic
period play an important role in regulating financial markets.
Table 7 reports the estimation results of model (6). The coefficients
of Xki, ×
t si, t ui, t in Eqs. [1]–[4] are the main focus of this section.
k
The coefficients of X× i, t si, t ui, t in Eqs. [1]–[4] are not significant,
indi- cating that, under different circumstances, there would be no
significant
difference in the impact of the severity of COVID-19 pandemic on the
transmission of unconventional monetary policies to the exchange rate
market.
In addition, the coefficients of dumi, t×ri, t in Tables 6 and 7 are
consistent with the sign and significance of the coefficients in Table 3,
indicating that the results of Eqs. [1], [3] and [4] in Table 3 are robust.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

transmission of conventional monetary policy to 10-year government

bond yields, exchange rates, and CDS spreads. Meanwhile, the weak-
ening impact on the transmission of conventional monetary policy to
stock market is close to significant. This indicates that the emergence
of pandemic has weakened the transmission of conventional
monetary policy to financial markets to a more significant degree so
that the ef- fects of conventional monetary policy on all four of
financial markets are insignificant during the pandemic. The
increased severity of pandemic has also mitigated the transmission of
unconventional monetary policies to stock and exchange rate markets
(Table 4). In Table 7, however, the coefficients of interaction term si, t
ui, t are not as significant as those in Table 4, indicating that the ×
impact of the severity of pandemic on the transmission of
unconventional monetary policies to financial markets is not sufficiently
robust.

4. Conclusions and policy implications

This study explores the impact of COVID-19 pandemic on the

transmission of monetary policy to financial markets, which covers a
sample of 37 countries with severe pandemics. We assess the impact
of not only the emergence of COVID-19 pandemic on the transmission
of monetary policy to financial markets but also the severity of it.
Our findings show that the emergence of pandemic has weakened the
transmission of monetary policy to financial markets to a more
signifi- cant degree; these results are robust, even when the
circumstance var- iables are taken into account. However, an increase
in severity of the pandemic hasn’t significantly affected the
effectiveness of the monetary policy transmission to financial
markets. As a result, during the COVID- 19 pandemic period, neither
conventional nor unconventional monetary policies have significant
effects on all four of the financial markets, including the government
bond, stock, exchange rate and CDS markets. Of course,
unconventional monetary policies are slightly more effective than
conventional policies because they can affect the stock and

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

Table 6 Table 7
Role of economic circumstances: full sample period. Role of economic circumstances: COVID-19 pandemic period.
Dependent variables [1] [2] [3] [4] Dependent variables [1] [2] [3] [4]

CDS CDS CDS CDS EXC EXC EXC EXC

ri, t 0.074** 0.073*** 0.073*** 0.073*** ri, t 0.001 —0.000 —0.001 0.000
(2.229) (41.734) (41.704) (41.753) (0.377) (—0.092) (—0.473) (0.302)
dumi, t 0.004 0.008 0.009 0.009 ui, t —0.005* —0.005* —0.006 —0.006**
(1.560) (0.799) (0.904) (0.881) (—2.053) (—1.798) (—1.871) (—1.244)
dumi, t × ri, t
—0.064* —0.069*** —0.068*** —0.069*** si, t —0.001 —0.001 —0.003 —0.001
(—1.787) (—4.944) (—4.753) (—4.910) (—0.414) (—0.173) (—0.645) (—0.347)
1
Xi, t —0.000 si, t × ui, t —0.047 —0.040 —0.081* 0.079
(—0.034) (—1.626) (—1.325) (—1.649) (0.782)
1
Xi, t × dumi, t × ri, t —0.020 X1i, t —0.002
(—1.553) X
1
s u (—1.306)
2
0.007
Xi, × ×
t
i, t i, t i, t —0.101
X2 (1.065) 2 (—1.242)
i, t × dumi, t × ri, t —0.057 Xi, t —0.000
(—0.983) (—0.195)
3 2
X i, t
—0.004 Xi, t × si, t × ui, t —0.124
(—0.576) (—1.489)
X3i, t × dumi, t × ri, t —0.026 Xi,3 t —0.000
(—0.665) (—0.208)
4 3
X i, t
—0.079** Xi, t × si, t × ui, t 0.054
(—2.187) (0.463)
4 4
X i, t × dumi, t × ri, t —0.028 Xi, t —0.000
c 0.002
(—0.648) 4 (—0.920)
0.002 0.003 X s u
—
(0.064) 0.040 i, t × i, t × i, t —0.015

2
R 0.261 (—0.093) (0.167) (1.450) (—1.488)
Observations 4893 0.261 0.262 0.219 c —0.000 —0.000 —0.001 0.001
Number of
4893 4893 4893 (—0.491) (—0.122) (—0.654) (0.558)
2
countries 37 37 37 37 R 0.160 0.151 0.134 0.161
Obs. 111 111 111 111
Notes: This table reports the results from the regressions of the model (5), that is,
Number of countries 24 24 24 24
the effects of changes in policy rates (ri, t), the emergence of COVID-19 (dumi, t),
Note: This table reports the results from the regressions of the model (6), that is,
the circumstance variables (Xki,,t k = 1,2,3,4) and their interaction terms (dum i, t the effects of changes in policy rates (ri, t), unconventional monetary policy
× ri, t and Xi,k t × dumi, t × ri, t) on the growth rates of CDS spreads. The estimation announcements (ui, t), the severity of COVID-19 (si, t), the circumstance variables
is based on the full sample period. The coefficient estimates are obtained by the
OLS method. t-statistics are reported in parentheses and ***/ **/* denote the (Xki, t, k=1,2,3) and their interaction terms (s i, t× r i, t, s i, t × ui, t , Xi,k t × si, t × i,r t and
significance at 99%, 95% and 90% confidence levels, Xki, t × si, t × ui, t) on the changes in exchange rates (EXC) and the growth rates of
respectively. significant effects on financial markets in the short term (sample
period of this paper), the
exchange rate markets to some extent.
Furthermore, the regression results of the circumstance variables
show that, even with different levels of industrialization and financial
development, there is no significant difference in the weakening
impact of the pandemic on monetary policy transmission. This may be
due to, even if a country has a higher level of industrialization or
financial development in 2019, manufacturing industry has been
disrupted and the demand for loans has fallen since the coronavirus
outbreak, making it impossible to reflect the difference in impact of the
pandemic on transmission of monetary policy due to different degrees
in industriali- zation and financial development. However, a higher
degree of trade openness could mitigate some of the weakening impact
of the pandemic on monetary policy transmission. Because the higher
the degree of trade openness, the less the economy and financial
markets are affected by the domestic pandemic. In addition, the fiscal
policies introduced during the pandemic have direct effects on exchange
rate and CDS markets to some extent.
The above findings have three important policy implications. First,
the central banks should implement more expansionary monetary policy
or resort to the other macro-policies during the COVID-19 pandemic
period since the transmission of monetary policy to financial markets
is weakened. In fact, the central banks in many countries have started
“printing money” pattern in response to the pandemic. For example,
interest rates are already adjusted to be negative in Switzerland,
Denmark and Hungary, while they are also close to negative territory
in New Zealand, Norway and Australia. Although these
unprecedentedly expansionary monetary policies do not have

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 X. Wei and L. International Review of Financial Analysis 74 (2021)
CDS spreads (CDS). In Eqs. [1]–[3] with the changes in exchange rates as participants’ over- reaction to the pandemic information and the
the dependent variables, multicollinearity exits between the severity of investors’ behavior such as herding behavior. This leads to the
COVID-19 pandemic, unconventional monetary policy announcements and consequence that a limited number of confirmed cases could cause a
circumstance variables. For this reason, these variables are decentered. The
large number of investors to shift to the safe assets by replacing
estimation is based on the sample of only COVID-19 pandemic period, i.e.,
financial assets, which further re- duces the stimulus effect of
January 22, 2020 - April 30, 2020. Coefficient estimates are obtained by the
OLS method. t-statistics in parentheses and ***/ **/* denote the significance
monetary policy on financial markets. For example, although the
at 99%, 95% and 90% confidence levels, respectively. severity of the pandemic in China, the United States, Japan and
Germany is different, the stimulation effects of their
monetary policies introduced in March and April 2020 on stock
recovered. Therefore, higher monetary policy changes are necessary markets are uniformly insignificant in the short term. All four stock
to regulate financial markets.
indexes7 did
Second, the insignificant impact of the increased pandemic
not begin to recover to the levels in early March until June 2020. As a
severity on monetary policy transmission suggests that, as long as the
result, the policy implications for central banks are that, even if a
number of confirmed cases reaches a threshold, whether serious or
country is not at the highest level of pandemic severity, the short-term
not, financial markets will slow down their responses to monetary
weakening effect of monetary policy on financial markets should be
policy in the short term. The possible reasons are the financial market
panic in financial markets has eased somewhat by the end of 2020. For
example, the S&P 500 has recovered by the end of 2020, and the stock 7
China’s HS300, the S&P 500 in the U.S., Japan’s Nikkei 225 and Germany’s
indexes in major emerging markets, excluding Russia, have also largely DAX.

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 X. Wei and L. International Review of Financial Analysis 74 (2021)

fully considered in the policy implementation.

Finally, the unconventional monetary policy can be used to stimulate banks can implement more flexible and diversified unconventional
the financial markets and reverse the economic downturns in the post- monetary policies and provide more targeted support to the real econ-
pandemic period since it is slightly more effective than conventional omy. Moreover, other macro policies may be needed to be
monetary policy. And unlike interest rate policy, many unconventional implemented. For example, a combination of unconventional
monetary policies tend to be targeted to support certain types of en- monetary policy and fiscal policy can be a better choice to regulate the
terprises such as those involved in fighting the epidemic of COVID-19 financial markets and stimulate the economy in the post-pandemic
or small and micro enterprises. Obviously, the effects of such period.
unconven- tional monetary policies on financial markets may not be
significant, but their changes can be transmitted directly to the micro- Acknowledgements
economy and play a positive role in economic recovery. Therefore, in
the future, the central This work was supported by the National Natural Science Foundation
of China (NSFC) [grant number 71850007 and 71673020].

Appendix A. Appendix
Table A1
Unconventional monetary policy announcements in 37 countries: January 22, 2020 - April 30, 2020.

Country Announcements

Argentina On March 19, the Central bank of Argentina announced that banks must reduce their LELIQ positions in order to lending more loans to the public.
Australia On March 13, the reserve bank of Australia injected 8.8 billion AUDs into markets in its open-market operations. On March 19, the reserve bank of Australia
announced to enter quantitative easing mode.
a
Euro area On March 10, the European commission said it would use all tools to maintain the economic stability.
On March 12, the European central bank unveiled its latest comprehensive portfolio of monetary policy tools: increasing temporary and long-term refinancing
operations; launching the new targeted longer-term refinancing operation (TLTRO-III); increasing bond purchases by 120 billion euros by the end of 2020;
temporarily relaxing banking regulatory requirements on capital and liquidity ratios.
On March 18, the European central bank announced an emergency purchase program in the amount of 750 billion euros.
Brazil On March 23, Bank of Brazil reduced the reserve requirement ratio (RRR) from 25% to 17%.
Canada –
Chile On March 27, the central bank of Chile announced that it would relax its liquidity management rules for banks.
China On February 3, the People’s Bank of China (PBC) launched the reverse repo operation on the open market for 1.2 trillion yuan.
On February 7, the PBC set up a special re-lending program in the amount of 300 billion yuan.
On February 26, the PBC increased its quota for refinancing and rediscount by 500 billion yuan.
On March 13, the PBC announced that it would implement a targeted reduction in the reserve requirement ratio for inclusive finance on March 16,
2020. On April 3, the PBC announced that it would reduce the required reserve ratio for small and medium-sized banks by 1 percentage point.
India On March 16, the governor of the reserve bank of India announced a long-term refinancing operation in the amount of 1 trillion rupees.
On March 27, India reduced its reverse repo rate by 90 basis points to 4.0%.
On April 17, the reserve bank of India injected 500 billion rupees into the financial system.
Indonesia Indonesia’s central bank bought government bonds of 8 and 6 trillion rupiahs on March 12 and 13, respectively.
Israel On April 21, the bank of Israel announced a relaxation of mortgage lending rules in the context of the COVID-19 pandemic.
Japan On March 16, the Bank of Japan announced the quantitative and qualitative easing policy, increasing the annual purchase target of ETF to 12 trillion yen,
adjusting the purchase scale of corporate bonds and commercial bonds, and increasing the purchase target of Japanese real estate investment trust to 180
billion yen.
On March 19, the bank of Japan announced to purchase of JPY 1 trillion of Japanese public bonds.
On April 27, the Bank of Japan decided to ease monetary policy, including expanding its purchases of commercial paper and corporate bonds. It also decided
to cancel the limit of government bond purchases.
b
Mexico —
Pakistan –
Peru –
Poland –
Qatar –
Romania –
Russia On March 17, the central bank of Russia announced that it would use liquidity facilities and relax the banking and financial regulations to minimize the impact
of the COVID-19 pandemic.
Saudi Arabia On March 14, the central banks of United Arab Emirates (UAE) and Saudi Arabia jointly announced a stimulus plan in the amount of 40 billion dollars.
Singapore On March 26, Singapore’s monetary authority announced it would provide up to 60 billion dollars to the banking sector.
On April 7, the monetary authority of Singapore announced the relaxation of some regulations to assist financial institutions to support their clients in the face
of COVID-19 pandemic.
South Africa –
South Korea On March 19, the Bank of Korea bought KRW 1.5 trillion of government bonds.
On March 26, the Bank of Korea announced it would pump unlimited amounts of cash into the market through repurchase operations.
Sweden On March 13, the Riksbank announced it would offer loans of up to SEK 500 billion to the companies.
On April 22, the Riksbank said it would buy municipal bonds.
Switzerland –
Turkey –
Ukraine On March 16, Ukraine’s President obliged the central bank, Ministry of Finance, state-owned commercial banks to provide loan support and tax changes for
small and medium-sized enterprises to respond to COVID-19 pandemic.
United Arab On March 14, the central banks of United Arab Emirates (UAE) and Saudi Arabia jointly announced a stimulus plan in the amount of 40 billion dollars.
Emirates Regulators in United Arab Emirates planned to provide 100 billion dirhams to the country’s banks and businesses.
United Kingdom On March 19, the Bank of England decided to increase its holdings of the UK government bonds and corporate bonds by GBP 200 billion to GBP 645 billion,
as well as expand its term funding facility.
United States On March 17, the Federal Reserve reactivated its commercial-paper funding facility, restarted the primary dealer credit facility.
On March 18, the U.S. Treasury secretary approved the creation of the money market investor financing facility.
On March 19, the Federal Reserve reported that it would buy USD 68 billion of interest-bearing Treasury securities in the morning and afternoon of Thursday
and Friday, and about USD 7 billion of Treasury inflation-protected securities (TIPS) each day.
(continued on next page)

1
 X. Wei and L. International Review of Financial Analysis 74 (2021)

Table A1 (continued )
Country Announcements

On March 23, the Federal Reserve announced that it would carry out unlimited and open-ended quantitative easing (QE).
On March 26, the Federal Reserve decided to cut the reserve requirement ratio to zero.
On March 31, the Federal Reserve announced the creation of a temporary repurchase agreement facility for foreign and international monetary authorities.
On April 9, the Federal Reserve announced a credit-support program in the amount of 2.3 trillion dollars and some purchases of high-yield bonds.
On April 23, the Federal Reserve announced the fourth bail-out program in the amount of 484 billion dollars.
Source: Author’s compilation based on the website of central bank and various issues of monetary policy report of each country.
a
The euro area countries in our sample contain Austria, Belgium, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain.
b
“—” means the unconventional monetary policy remains unchanged in the COVID-19 pandemic period (January 22, 2020 - April 30, 2020).

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