## Capital Markets, COVID-19 and Policy Measures

_IMF Working Papers, February 12, 2021_

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**Canonical URL:** [Capital Markets, COVID-19 and Policy Measures](https://www.imf.org/en/publications/wp/issues/2021/02/12/capital-markets-covid-19-and-policy-measures-50072)

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## Bibliographic details
- Authors: Khalid ElFayoumi, Martina Hengge
- Published: February 12, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513569413.001

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### Summary
- The COVID-19 pandemic and associated policy responses triggered a historically large wave of capital reallocation between markets and asset classes.
- Using high-frequency country-level data, the paper examines whether and how:
  - the number of COVID cases,
  - the stringency of the lockdown, and
  - the fiscal and monetary policy response
  determined the dynamics of portfolio flows.
- Despite more dominant global factors, domestic factors played an important role, particularly for emerging markets and bond flows, contributing to a global wave of reallocation to safer asset classes.

### Key findings
- Rising domestic COVID cases had a strong positive effect on portfolio flows, which responded to an increase in financing needs in affected economies.
- Lockdown and fiscal policy measures also led to an increase in portfolio flows; evidence from the CDS market suggests that the increase in flows was dominated by supply forces, reflecting investors' preference for stronger policy responses.
- Interest rate cuts led to a decline in portfolio flows as investors searched for higher yield.
- COVID policy responses affected countries' exposure to the global shock.
- Pre-COVID macroeconomic conditions influenced flow magnitudes during the COVID episode:
  - lower sovereign risk contributed to larger flows,
  - higher trade openness contributed to larger flows.
- Effects were particularly pronounced for emerging markets and bond flows.

### Policy implications and interpretation
- Stronger fiscal responses and stricter lockdown measures were associated with increased portfolio flows, but market evidence (CDS) signals that these flows were largely supply-driven—investor preference for stronger policy responses—rather than solely demand-driven.
- Monetary easing (interest rate cuts) may reduce portfolio flows by encouraging investors to seek higher yields elsewhere, suggesting trade-offs between domestic monetary accommodation and capital flow dynamics.
- Pre-existing macroeconomic strength (lower sovereign risk, greater trade openness) amplified capital inflows during the COVID episode, highlighting the importance of resilient fundamentals.

### Data, scope, and approach
- Empirical approach: high-frequency country-level data covering portfolio flows, COVID cases, lockdown stringency, fiscal measures, and monetary policy actions.
- Markets examined include portfolio flows, bond flows, and the CDS market.
- Emphasis on differentiation between domestic factors and dominant global factors in driving capital reallocation.
- Focus on heterogeneity across countries, with emergence of stronger effects in emerging markets.

### Publication and metadata
- Authors: Khalid ElFayoumi, Martina Hengge
- Publication date: February 12, 2021
- Series: Working Paper No. 2021/033
- Volume: 2021
- Issue: 033
- Pages: 36
- DOI: https://doi.org/10.5089/9781513569413.001
- Stock No: WPIEA2021033
- ISBN: 9781513569413
- ISSN: 1018-5941
- Subjects: Bonds, Central bank policy rate, COVID-19, Credit default swap, Fiscal stimulus
- Keywords: Capital flows, Covid case, Emerging markets, Fiscal policy, infection shock, Lockdown policy, Monetary policy, monetary policy action, policy measure, portfolio flow, Pull factors, trade openness, WP

*IMF Working Papers*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/02/12/capital-markets-covid-19-and-policy-measures-50072_