Hang in There: Stock Market Reactions to Withdrawals of COVID-19 Stimulus Measures

Author/Editor:

Jorge A Chan-Lau ; Yunhui Zhao

Publication Date:

December 18, 2020

Electronic Access:

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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:

The COVID-19 pandemic prompted unprecedented economic stimulus worldwide. We empirically examine the impact of a withdrawal of fiscal stimulus policies on the stock markets. After constructing a database of withdrawal events, we use event study analysis and cross-country regressions to assess the difference between the pre- and post-event stock price returns. We find that markets react negatively to premature withdrawals—defined as withdrawals at a time when the daily COVID cases are high relative to their historical average—likely reflecting concerns about the withdrawal impact on the prospects for economic recovery. The design of a successful exit strategy from COVID-19 policy responses should account for these concerns.

Series:

Working Paper No. 2020/285

Frequency:

regular

English

Publication Date:

December 18, 2020

ISBN/ISSN:

9781513564753/1018-5941

Stock No:

WPIEA2020285

Format:

Paper

Pages:

22

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