Conventional monetary policy, COVID-19, and stock markets in emerging economies

Abstract

We examine whether conventional monetary policy moderated the impact of the COVID-19 pandemic on stock markets. Using daily historical data on emerging economies, we show that the pandemic has an adverse impact on stock markets by reducing stock returns. We then show that, in the presence of conventional monetary policy, the adverse impact does not disappear. We probe into the robustness of these findings by considering, among others, alternative COVID-19 indicators, fixed effects, cointegrating dynamics, stock market characteristics, and monetary policy frameworks, and find them to be robust. An implication is that conventional monetary policy alone may not be an effective tool during the pandemic and that policymakers should coordinate conventional monetary policy with other policies to restore stock markets to their pre-crisis level.