Handle with Care: Regulatory Easing in Times of COVID-19
Valencia Fabián (),
Varghese Richard (),
Yépez Juan F. () and
Yao Weijia ()
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Valencia Fabián: International Monetary Fund, 700 19th street, Washington DC, 20431-0001, USA
Yépez Juan F.: International Monetary Fund, Washington DC, USA
Yao Weijia: International Monetary Fund, 1900 Pennsylvania Ave NW, Washington DC, 20431, USA
The B.E. Journal of Macroeconomics, 2022, vol. 22, issue 1, 363-396
The policy response to the COVID-19 shock included regulatory easing across many jurisdictions to facilitate the flow of credit to the economy and mitigate a further amplification of the shock through tighter financial conditions. Using an intraday event study, this paper examines how stock prices – a key driver of financial conditions – reacted to regulatory easing announcements in a sample of 18 advanced economies and 8 emerging markets. It finds that regulatory easing announcements contributed to looser financial conditions but effects varied across sectors and tools. News about regulatory easing led to lower valuations for financial sector stocks, mainly in jurisdictions with relatively lower capital buffers. These results stand in stark contrast with valuations of non-financial sector stocks, which increased in response to regulatory relief announcements, particularly in industries that are more dependent on bank financing. The effects also differed across tools. Valuations declined and financial conditions tightened following announcements related to easier bank capital regulation while equity valuation rose and financial conditions loosened after those about liquidity regulation.
Keywords: stock prices; policy announcements; financial conditions; capital; liquidity; COVID-19 (search for similar items in EconPapers)
JEL-codes: E65 G01 G14 G28 (search for similar items in EconPapers)
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