Unconventional monetary policy and disaster risk: Evidence from the subprime and COVID–19 crises

Abstract

We compare the interventions conducted by the Federal Reserve in response to the subprime and COVID–19 crises with respect to their effectiveness in reducing disaster risk. Using model-free measures of disaster risk derived from daily options data, we document that interventions in response to both crises reduced tail risks in domestic equity markets. The spillover effects of the two crises have been markedly dissimilar. While subprime interventions are generally characterized by negative spillovers to international equity markets, policy responses to the COVID–19 crisis are generally associated with positive spillovers. We interpret these results as consistent with the different degrees of protagonism by central banks in the two episodes, emphasizing the importance of a broader participation of monetary authorities in expanding their balance sheets to counteract the effects of major crises.

The Impact of the COVID-19 Pandemic on Economic Growth and Monetary Policy: An Analysis from the DSGE Model in Vietnam

“…Some case studies included below. Cortes et al (2022) compared interventions taken by the Federal Reserve in response to the subprime crisis and the COVID-19 pandemic crisis. In essence, these two crises are different, the subprime lending crisis has an endogenous origin from the economy, while the crisis caused by the COVID-19 epidemic has an exogenous origin.…”

Can Digital Economy Promote Energy Conservation and Emission Reduction in Heavily Polluting Enterprises? Empirical Evidence from China

“…In addition, we consider the impact of two relevant market forces: Environmental, Social, and Governance (ESG) investment and quantitative easing (QE) policies [ 55 ]. First, the sample period of this paper coincides with the massive increase in popularity of ESG investing [ 56 , 57 ], The increase in the fraction of institutional investors that follow ESG policies is likely correlated with the digitalization trends in China.…”

“…By construction, as more institutional investors incorporate ESG aspects into their portfolio allocation decisions firms become more environmentally friendly due to investor’s preferences and improve CECER. Second, in response to the financial and sovereign-debt crises that occurred in the late 2000s and early 2010s, central banks of major economies (e.g., US Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan) engaged in massive quantitative easing policies [ 55 , 58 ]. Affected by the 2008 financial crisis, the Chinese government implemented the “4 trillion economic stimulus plan” in November 2008.…”

“…Following Hattori et al [ 58 ] and Cortes et al [ 55 ], we control the impact of QE policies using event-study approach. Specifically, we set dummy variables based on the timing of the FED’s QE policy.…”

Covid-19 impact on Latin and Asian stock markets

“…(2020) and Goodell (2020) who described the effects of this epidemic on the financial markets. Using measures without a disaster risk model derived from daily data on options, Cortes et al. (2021) compared federal reserve response to the subprime and Covid-19 in terms of their effectiveness in reducing disaster risks.…”