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EMDE Central Bank Interventions during COVID-19 to Support Market Functioning
Author:
Kelly Eckhold
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https://orcid.org/0000-0003-2040-331X
,
Julia Faltermeier https://isni.org/isni/0000000404811396 International Monetary Fund

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,
Darryl King
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https://orcid.org/0000-0002-8132-5039
,
Istvan Mak
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Dmitri Petrov
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Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 101
Language:
English
Publication Date:
17 May 2024
DOI:
https://doi.org/10.5089/9798400275845.001
ISBN:
9798400275845
ISSN:
1018-5941
Pages:
77
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund