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

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

May 17, 2024

Preview Citation

Format: Chicago

Kelly Eckhold, Julia Faltermeier, Darryl King, Istvan Mak, and Dmitri Petrov. EMDE Central Bank Interventions during COVID-19 to Support Market Functioning, (USA: International Monetary Fund, 2024) accessed December 22, 2024

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.

Summary

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.

Subject: Asset and liability management, Central bank operations, Central Banks, Financial markets, Financial sector policy and analysis, Financial sector stability, Liquidity, Money markets, Securities markets

Keywords: Africa, And financial stability., Central bank interventions, Central bank operations, Chicago Board option exchange volatility index, COVID-19 pandemic, Financial sector stability, Global, Government securities intervention, Intervention trigger, Liquidity, Market dysfunction, Money market intervention, Money markets, Securities markets

Publication Details

Pages:

77
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/101
Stock No:

WPIEA2024101
ISBN:

9798400275845
ISSN:

1018-5941

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