IMF Working Papers

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

Author/Editor:

Kelly Eckhold ; Julia Faltermeier ; Darryl King ; Istvan Mak ; Dmitri Petrov

Publication Date:

May 17, 2024

Electronic Access:

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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.

Series:

Working Paper No. 2024/101

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

Frequency:

regular