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Rare disasters, exchange rates, and macroeconomic policy: Evidence from COVID-19

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  • Zhou, Hang
  • Yu, Mei
  • Li, Jiahui
  • Qin, Qilin

Abstract

The rapid spread of the novel coronavirus (COVID-19) has had a dramatic effect on financial markets worldwide. This paper explores the association between rare disasters, macroeconomic policy, and the exchange rate, using COVID-19 as an example. Analysis of data from 27 advanced and emerging economies reveals a strong correlation between COVID-19 and time-varying risk premiums in the foreign exchange market. Moreover, the spread of COVID-19 significantly depreciates the domestic exchange rate in emerging markets, but not in advanced countries. During the COVID-19 crisis, expansionary fiscal policies and unconventional monetary policies led to an appreciation of local currencies. However, conventional expansionary monetary policies had the opposite effect, indicating that the traditional effect of monetary policy on the exchange rate takes precedence even in the event of a rare disaster.

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  • Zhou, Hang & Yu, Mei & Li, Jiahui & Qin, Qilin, 2021. "Rare disasters, exchange rates, and macroeconomic policy: Evidence from COVID-19," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521003761
    DOI: 10.1016/j.econlet.2021.110099
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    References listed on IDEAS

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    2. Matsuki, Takashi & Pan, Lei, 2021. "How did Australian financial markets react to the COVID-19 vaccine rollout? Fresh evidence from quantile copula spectrum analysis," MPRA Paper 111136, University Library of Munich, Germany.
    3. Bonato, Matteo & Cepni, Oguzhan & Gupta, Rangan & Pierdzioch, Christian, 2023. "Climate risks and realized volatility of major commodity currency exchange rates," Journal of Financial Markets, Elsevier, vol. 62(C).
    4. Shabir, Mohsin & Jiang, Ping & Wang, Wenhao & Işık, Özcan, 2023. "COVID-19 pandemic impact on banking sector: A cross-country analysis," Journal of Multinational Financial Management, Elsevier, vol. 67(C).
    5. Hsuan Fu & Jui‐Chung Yang, 2022. "International currency markets and the COVID‐19 pandemic," Pacific Economic Review, Wiley Blackwell, vol. 27(4), pages 400-422, October.
    6. Cunwei Yang & Weiqing Wang & Fengying Li & Degang Yang, 2022. "One-Size-Fits-All Policies Are Unacceptable: A Sustainable Management and Decision-Making Model for Schools in the Post-COVID-19 Era," IJERPH, MDPI, vol. 19(10), pages 1-21, May.
    7. Klose, Jens, 2023. "European exchange rate adjustments in response to COVID-19, containment measures and stabilization policies," Economic Modelling, Elsevier, vol. 128(C).

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