This paper empirically examines the reaction of global financial markets across 38 economies to the COVID-19 outbreak, with a special focus on the dynamics of capital flow across 14 emerging market economies. Using daily data over the period 4 January 2010 to 30 April 2020 and controlling for a host of domestic and global macroeconomic and financial factors, we use a fixed effects panel approach and a structural VAR framework to show that emerging markets have been more heavily affected than advanced economies. In particular, emerging economies in Asia and Europe have experienced the sharpest impact on stocks, bonds, and exchange rates due to COVID-19, as well as abrupt and substantial capital outflows. Our results indicate that fiscal stimulus packages introduced in response to COVID-19, as well as quantitative easing by central banks, have helped to restore overall investor confidence through reducing bond yields and boosting stock prices. Our findings also highlight the role that global factors and developments in the world's leading financial centers have on financial conditions in EMEs. Importantly, the impact of COVID-19 related quantitative easing measures by central banks in advanced countries, which helped to lower sovereign bond yields and prop up stock markets at home, extended to EMEs, notably in relation to stabilizing capital flow dynamics. Going forward, while the ultimate resolution of COVID-19 may be expected to lead to a market correction as uncertainty declines, our impulse response analysis suggests that there may be some permanent effects on financial markets and capital flows as a result of COVID-19, particularly in EMEs.

This paper empirically examines the reaction of global financial markets across 38 economies to the COVID‐19 outbreak, with special focus on the dynamics of capital flows across 14 emerging market economies. The effectiveness of fiscal and monetary policy responses to COVID‐19 is also tested. Using daily data over the period January 4, 2010 to August 31, 2020, and controlling for a host of domestic and global macroeconomic and financial factors, we use a fixed effects panel approach and a structural VAR framework to show that emerging markets have been more heavily affected than advanced economies. In particular, emerging economies in Asia and Europe have experienced the sharpest impacts on stock, bond and exchange rates due to COVID‐19, as well as abrupt and substantial capital outflows. Quantitative easing and fiscal stimulus packages mainly helped to boost stock prices, notably for advanced and emerging economies in Asia. Our findings also highlight the role that global factors and developments in the world's leading financial centers have on financial conditions in EMEs. Importantly, the impact of COVID‐19 related quantitative easing measures by central banks in advanced countries extended to EMEs, with significant positive spillovers to EME stock markets in Asia, Europe and Latin America. Going forward, while the ultimate resolution of COVID‐19 may be expected to lead to a market correction as uncertainty declines, our impulse response analysis suggests that there may be persistent effects on bond markets in emerging Europe and on EME capital flows.

We discuss the impacts of the COVID-19 pandemic on Indonesia’s financial markets and monetary policy dynamics. We explore five types of financial markets in Indonesia: (1) the Rupiah (IDR) interbank money market; (2) the US Dollar (USD) interbank money market; (3) government conventional bond (SUN) markets; (4) the stock market; and (5) the USD/IDR spot market. We examine Bank Indonesia’s (BI)'s three monetary policy instruments: (1) BI 7-day Reverse Repo Rate (the policy rate); (2) minimum reserve requirement ratios for banks (GWM); and (3) BI’s monetary operations. We find that several policy instruments have significant impacts on specific financial markets before and during the pandemic, i.e., the policy rate on the IDR and USD interbank money market, the IDR GWM on the medium-term SUN market, and the foreign exchange (FX) GWM on the FX market. We also find that the COVID-19 pandemic strengthened the impacts of BI’s policy instruments on particular financial markets during the pandemic than the pre-pandemic period. We suggest BI continues to maintain the stability of financial markets to support the government efforts to restore the economy from the fiscal side.

We examine the relationship between financial sector development and the shadow economy in Indonesia from 1980 to 2020. We estimate the size of Indonesia's shadow economy using the "Modified Cash to Deposits Ratio" approach. We then construct a long-term model using the size of Indonesia's shadow economy as the dependent variable. We set financial sector development as the main independent variable in our model. We use per capita real gross domestic product, the misery index, and foreign direct investment as control variables in our model. We find that financial sector development and the size of Indonesia's shadow economy have a nonlinear relationship that shows an inverted U-shape curve. The size of the shadow economy expands at the early stages of financial sector development to a turning point and decreases when financial sector development increases further. We also find that foreign direct investment curtails Indonesia's shadow economy. Additionally, increases in income expand Indonesia's shadow economy while misery index shows ambiguous results. We suggest the Indonesian authorities widen access for micro, small, and medium firms to the credit markets and enhance existing programs to reduce poverty and narrow the income gap in the country. These efforts help to narrow the size of Indonesia's shadow economy.

Demand for cash is generally known to be influenced by several factors—including transaction motive used for payment, opportunity cost, precautionary motive, and other motives (such as aging and demand from abroad). In recent years, cashless payment methods have increasingly become prevalent in the world through various conventional tools and innovative convenient financial services using mobile phones and smart phones. Nevertheless, cash in circulation has been rising in many economies, especially after the global financial crisis. This paper seeks to examine factors affecting cash in circulation for 22 economies for the period 2000–2018. It also investigated the movements of banknotes in circulation differentiated by denomination for seven economies whose data were available. The empirical analysis of this paper found that the opportunity cost proxied by the central bank policy rates and age-related variable were the two most important robust determinants for cash demand. Namely, cash demand tends to grow with a decline in the policy rates and with an advancement of aging.