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

IMF Working Papers, May 17, 2024

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

Authors: Kelly Eckhold, Julia Faltermeier, Darryl King, Istvan Mak, Dmitri Petrov
Published: May 17, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400275845.001

Authors: Kelly Eckhold, Julia Faltermeier, Darryl King, Istvan Mak, Dmitri Petrov
Date: May 17, 2024
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.
Focus is on the functioning of the financial markets that are key to maintaining financial stability—money, securities, and FX funding markets.

Objectives should be well-specified and communicated to facilitate eventual exit.
Intervention triggers should prioritize liquidity metrics over prices.
Actions should be sufficiently large to address market dysfunction.
The risks of fiscal dominance and moral hazard should be minimized.
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.

Geographic and thematic emphasis: EMDEs, with attention to less-developed financial markets and lower levels of institutional credibility.
Market types analyzed: money markets, securities markets, FX funding markets.
Methods: empirical analysis and case study reviews.

Clearly specify and communicate program objectives to enable credible and orderly exit strategies.
Use liquidity-based triggers rather than price-based triggers to determine interventions.
Ensure intervention scale is large enough to restore market functioning.
Incorporate safeguards to limit fiscal dominance and moral hazard.
Structure operations to encourage rapid self-liquidation—via pricing or short-term maturities—to limit balance-sheet exposure.

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

IMF Working Paper No. 2024/101.