Monetary policy as market stabilizer in the COVID-19 pandemic

Yimin Shan; Yang Chen; Yajun Xiao

doi:10.1016/j.frl.2023.103960

Monetary policy as market stabilizer in the COVID-19 pandemic

Financ Res Lett. 2023 Jul:55:103960. doi: 10.1016/j.frl.2023.103960. Epub 2023 May 1.

Authors

Yimin Shan¹, Yang Chen¹, Yajun Xiao¹

Affiliation

¹ International Business School Suzhou, Xi'an Jiaotong-Liverpool University, 8 Chongwen Road, Suzhou, China.

Abstract

We categorize expansionary monetary policies based on interest rates, monetary easing, and liquidity decisions. We find that the stock market reacts positively to liquidity policy announcements by a more significant margin during and after the COVID-19 at market and industry levels compared with reactions to interest rate or monetary easing policy announcements. The economic consequences are large and persistent. Using firm characteristics as proxies for monetary policy transmission channels, we find that at firm level, the positive responses to liquidity policy announcements during the crisis are more pronounced for small and medium-sized businesses and non-state-owned enterprises relative to other enterprises.

Keywords: Chinese monetary policy; Event study; Monetary policy transmission channels; Stock market.