EMDE Central Bank Interventions during COVID-19 to Support Market Functioning

Kelly Eckhold, Julia Faltermeier, Darryl King, Istvan Mak and Dmitri Petrov

No 2024/101, IMF Working Papers from International Monetary Fund

Abstract: This paper examines emerging market and developing economy (EMDE) central bank interventions to maintain financial stability during the COVID-19 pandemic. Through empirical analysis and case study reviews, it identifies lessons for designing future programs to address challenges faced in EMDEs, including less-developed financial markets and lower levels of institutional credibility. The focus is on the functioning of the financial markets that are key to maintaining financial stability—money, securities, and FX funding markets. Several lessons emerge, including: (i) objectives should be well-specified and communicated to facilitate eventual exit; (ii) intervention triggers should prioritize liquidity metrics over prices; (iii) actions should be sufficiently large to address market dysfunction; (iv) the risks of fiscal dominance and moral hazard should be minimized; and (v) program design should incentivize self-liquidation by appropriate pricing or through short-term operations that quickly liquidate. While interventions may increase risks to central bank balance sheets, potentially challenging policy solvency and operational independence, a well-designed framework can significantly mitigate these risks.

Keywords: COVID-19 pandemic; central bank interventions; liquidity; and financial stability.; intervention trigger; money market intervention; market dysfunction; Chicago Board option exchange volatility index; government securities intervention; Central bank operations; Financial sector stability; Securities markets; Money markets; Global; Africa (search for similar items in EconPapers)
Pages: 77
Date: 2024-05-17
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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